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Revised Bagtas Reviewer by Ve and Ocfe 2A

ATENEO DE MANILA LAW SCHOOL


OUTLINE ON PHILIPPINE Atty.
CESAR L. VILLANUEVA
CORPORATE LAW
1
2ND SEMESTER, SY 2004-2005
I. HISTORICAL BACKGROUND
. P!"#"$$"%& C'($'()t& L)*+
2
S'(t ', C'-",".)t"'% ', A/&(".)% C'($'()t& L)*
Under American sovereignty, attention was drawn to the fact that there was no entity in
Spanish law eactly corresponding to the notion !corporation! in "nglish and American law#
the $hilippine %ommission enacted the %orporation &aw 'Act (o) 1*+,-, to introd.ce the
American corporation into the $hilippines as the standard commercial entity and to hasten the
day when the sociedad annima of the Spanish law wo.ld be obsolete) /he stat.te is a sort of
codification of American %orporate &aw) Harden v. Benguet Consolidated Mining,

+0 $hil) 1*1
'1,11-)
2. T!& C'($'()t"'% L)*
/he first corporate stat.te, the %orporation &aw, or Act (o) 1*+,, became effective on 1
April 1,23) 4t had vario.s piece5meal amendments d.ring its 6*5year history) 4t rapidly
became anti7.ated and not adapted to the changing times)
0. T!& C'($'()t"'% C'-&
/he %orporation %ode 'Batas Pambansa Blg) 30- too8 effect on 1 9ay 1,02) 4t adopted
vario.s corporate doctrines en.nciated by the S.preme %o.rt .nder the old %orporation &aw)
4t clarified the obligations of corporate directors and officers, epressed in stat.tory lang.age
established principles and doctrines, and provided for a chapter on close corporations)
4. P('$&( T(&)t/&%t ', P!"#"$$"%& C'($'()t& L)*
$hilippine %orporate &aw comes from the common law system of the United States)
/herefore, altho.gh we have a %orporation %ode that provides for stat.tory principles,
%orporate &aw is essentially, and contin.es to be, the prod.ct of commercial developments)
9.ch of this development can be epected to happen in the world of commerce, and some
epressed :.rispr.dential r.les that try to apply and adopt corporate principles into the
changing concepts and mechanism of the commercial world)
1Unless otherwise indicated, all references to sections pertain to /he %orporation %ode of the $hilippines)
2/he whole body of stat.tory and :.rispr.dential r.les pertaining to corporations is referred to as !%orporate
&aw! to differentiate it from the old stat.te 8nown as !/he %orporation &aw,! or Act (o) 1*+,)
%&V; <e sho.ld note that there m.st be an .nderlying contract between and among the people forming the corporation for it is .pon s.ch contract that the state grant is conferred) A corporation will be formed only when + individ.al persons , as incorporators, agree to form a corporation and the state gives its consent) Being only a creat.re of law, it has only the powers, attrib.tes and properties which the law wishes to grant)
II. CONCEPTS
See opening paragraphs of V4&&A(U"VA, Corporate Contract Law, 10 A/"("O &)=) 1 '(o)
2, =.ne 1,,*-
. D&,"%"t"'% 'Section 2# Articles **'1-, *+, *3, and 166+, %ivil %ode-
Sec) 2 %orporation defined > A corporation is an artificial being created by operation of law,
having the rights of s.ccession and the powers attrib.tes and properties, epressly
a.thori?ed by law or incident to its eistence)
Art) **'1- /he following are :.ridical persons > %orporations, partnerships and associations for
private interest or p.rpose to which the law grants a :.ridical personality, separate and
distinct from that of each shareholder, partner or member)
Art) *+ =.ridical persons mentioned in (os)1 and 2 of the preceding article are governed by laws
creating or recogni?ing them)
$rivate corporations are reg.lated by laws of general application on the s.b:ect)
$artnerships and associations for private interest or p.rpose are governed by the provisions
of this %ode concerning partnerships)
Art) *3 =.ridical persons may ac7.ire and possess property of all 8inds, as well as inc.r
obligations and bring civil or criminal actions, in conformity with the laws and reg.lations of
their organi?ation)
Art) 166+ Association and societies, whose articles are 8ept secret among the members, and
wherein any pone of the members may contract in his own name with third persons, shall
have no :.ridical personality, and shall be governed by the provisions relating to co5ownership
corporation is an artificial being created by operation of law) 4t has a personality separate
and distinct from the persons composing it, as well as from any other legal entity to which it
may be related) PB v. !ndrada "lectric # "ng$ring Co., 101 S%RA 2** '2222-)
- @an artificial beingA 5 a person created by law or by state# legal fiction
- @created by lawA > its eistence is dependent .pon the onsent or grant of the state
"B%"$/ corporation by estoppel and de facto corporation
- the definition of a corporation is merely a g.ide and does not really provide for the
basis of a corporation
C) <hy is it important to 8now that the corporation is a :.ridical personD
A) /o be able to 8now that the corporation is able to contract with others)
Revised Bagtas Reviewer by Ve and Ocfe 2A
C) <hy does the definition of a corporation involve a statement @creat.re of the lawAD
A) /o reiterate the fact that the corporation can only do acts given to it by the law) 4t is of limited
eistence, o.tside its powers, it does not eist)
2. T("-L&1&# E2"3t&%.& ', t!& C'($'()t"'%
4)5 AGGREGATION O6 ASSETS AND RESOURCES > physical assets of the corporation# the tangibles
' e) in a grocery, the goods being sold-
475 BUSINESS ENTERPRISE OR ECONOMIC UNIT > the commercial vent.re# this incl.des not only the
tangible assets b.t also the intangibles li8e goodwill created by the b.siness
t
C5 8URIDICAL ENTITY > :.ridical eistence as a person# the primary franchise granted by the state
C) <hy is the distinction between the three levels importantD
A) "ach is important in its own way as there are conse7.ences for each) /he distinctions become
important and come into play when it comes to dealing with corporation law <hat are yo. selling or
b.ying 'and their worth- will depend .pon the partic.lar level yo. choose) "BA9$&"; 4f yo. merely
want to p.rchase the assets and not the b.siness, a simple deed of sale wo.ld s.ffice and yo. will
not be liable for contingent liabilities) 4t will be different if yo. b.y the b.siness as an economic
concept) S"% Reg.lations or B.l8 sales &aw may be applied)
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A5 8URIDICAL ENTITY LEVEL, which views the State5corporation relationship
- the state cannot destroy a corporation witho.t observing d.e process of law
475 INTRA-CORPORATE LEVEL, which considers that the corporate setting is at once a contract.al
relationship on fo.r '*- levels;
Between the corporation and its agents or
representatives to act in the real world, s.ch as its
directors and its officers, which is governed also by the
&aw on Agency
Between the corporation and its shareholders or
members
Between and among the shareholders in a common
vent.re
v
B5 E:TRA-CORPORATE LEVEL, which views the relationship between the corporation and
third5parties or @o.tsidersA, essentially governed by %ontract &aw and &abor &aw)
- most imporatant level, highest form of law in this level is contract law)
4. T!&'("&3 '% t!& 6'(/)t"'% ', C'($'()t"'%+
- the S% has loo8ed .pon the corp) not merely as an artificial being b.t more as an
AEERU$A/4O( OF $"RSO(S GO4(E BUS4("SS or A( U(G"R&H4(E "%O(O94% U(4/)
- /he corp) is emerging as an enterprise bo.nded by economics rather than an artificial
personality bo.nded by forms of words in a charter, min.te boo8s I boo8s of
acco.nts)
- /he proposition that a corp) has an eistence separate and distinct from its
1
T)y)9 13 B&%9;&t C'%3'#"-)t&-, I%.. 42< SCRA 2425
membership has its limitations) 'Separate eistence is for a partic.lar p.rpose)-
/here can be no corp) eistence wJo persons to compose it I there can be no
association wJo associates)
4)5 T!&'(y ', C'%.&33"'% 'a%a&ag v. Benguet Consolidated, 23 S%RA 2*2 K1,30L-)
- corporation > creat.re of the state
- limited > no other privilege may be eercised beyond grant
/o organi?e a corporation that co.ld claim a :.ridical personality of its own and
transact b.siness as s.ch, is not a matter of absol.te right b.t a privilege which may be
en:oyed only .nder s.ch terms as the State may deem necessary to impose) cf. !ng Pue
# Co. v. Sec. of Commerce and 'ndustr&, + S%RA 3*+ '1,32-
@4t is a basic post.late that before a corporation may ac7.ire :.ridical personality, the
State m.st give its consent either in the form of a special law or a general enabling act,A
and the proced.re and conditions provided .nder the law for the ac7.isition of s.ch
:.ridical personality m.st be complied with) Altho.gh the stat.tory grant to an association
of the powers to p.rchase, sell, lease and enc.mber property can only be constr.ed the
grant of a :.ridical personality to s.ch an association ) ) ) nevertheless, the fail.re to
comply with the stat.tory proced.re and conditions does not warrant a finding that s.ch
association ac7.ired a separate :.ridical personality, even when it adopts sets of
constit.tion and by5laws) 'nternational "(press %ravel # %our Services, 'nc. v. Court of
!ppeals, 1*1 S%RA 36* '2222-)
Since all corporations, big or small, m.st abide by the provisions of the %orporation
%ode, then even a simple family corporation cannot claim an eemption nor can it have
r.les and practices other than those established by law) %orres v. Court of !ppeals, 260
S%RA 6,1 '1,,6-)
6ACTS+
- 4donah Slade $er8ins died in 1,32 with %o.nty /r.st I %o) of (ew Hor8 as her
domiciliary administrator I left, among others, 2 stoc8 certificates covering 11, 222
shares of stoc8 of appellant Beng.et %onsolidated, 4nc)
- Renato /ayag, as ancilliary administrator in the $hilippines, re7.ested %o.nty /r.st
to s.rrender to ancilliary administrator the stoc8 certificates to satisfy the legitimate
claims of local creditors) Mowever, %o.nty /r.st ref.sed)
- /he lower co.rt then presided by =.dge Santos r.led that ;
1) stoc8 certificates are considered lost for all p.rposes of admin) I li7.idation
of the $hilippine estate of $er8ins
2) said certificates are cancelled
1) directs said corp) /o iss.e new certificates in lie. thereof, the same to be
delivered by aid corp) to either /ayag or the $robate division of this co.rt)
- An appeal was ta8en not by %o.nty /r.st, as domiciliary admin), b.t by Beng.et on
the gro.nd that the certificates of stoc8 are eisting and in possession of %o.nty
/r.st) /hey also assert that there was a fail.re to observe certain re7.irements of
its by5laws before new stoc8 certificates co.ld be iss.ed)
ISSUE+ <hether or not Beng.et properly p.rs.ed the appealD
HELD+ /he %o.rt held that the appeal cannot prosper) =.dgment affirmed) Beng.et bo.nd by
order)
- the challenged order represents a response I epress a policy arsing o.t of a
specific problem, addressed to the attainent of specific ends by the .se of specific
remedies, wJ f.ll I ample s.pport from legal doctrines of weight and significance)
/AHAE GO%/R4("S; Formally adopts the concession theory# corp wJo imprimat.r o.tside state grant)
even if it has its own set of by laws etc), the corp wo.ld still have to obey the order of the state
repr.diated the application of ""/ > corp as reality of the gro.p as a social I legal entity independent of state recognition I concession)
%&VNs metaphor on Eod; !<hen Eod granted .s life, he did not say that we sho.ld be attached to Mim) Me said go and m.ltiply) 4n the same way, the State after granting the corp) life of its own tells it to go and m.ltiply profitably) /he corp) li8e every =.an and 9aria given life by Eod acts on its own volition and by its own action does good and sin) B.t li8e Eod, the State, maintains .pon its creat.re certain r.les to follow in tis day to day eistence)
%&V; Fiction cannot be created .nless there is an enterprise or gro.p of persons .pon whom it wo.ld be conferred) B.t inspite of the .nderlying contract among the persons wanting to form a corp), the grant is only by virt.e of a primary franchise given by the state) And it is within the power of the state to grant it or not) B.t once granted, :.ridical personality is ac7.ired, however, this doesnNt mean that the gro.p becomes the creat.re of the state, b.t act.ally becomes a creat.re of its own volition and remains as a distinct personality
Revised Bagtas Reviewer by Ve and Ocfe 2A
- A disagreement ens.ed between the ancilliary and the domiciliary admin to who ws
entitled the certificate of stoc8s
- /he %F4 ordered %o.nty /r.st to prod.ce and deposit the stoc8s with the co.rt wJc
wasnNt complied with /h.s the order of the %F4)
- Beng.et didnNt disp.te /ayagNs a.thority to gain control I possession of all the
assets of the decedent wJn the $hil)
- %orporation is an artificial being created by operation of law) 4t owes it life to the
state its birth being p.rely dependent on its will)
- Flether; @A corp) is not in fact and in reality a person, b.t the law treats it as tho.gh
it were a person by process of fiction, or by regarding it as an artificial person
distinct and separate from its individ.al stoc8holders)
- /here is th.s a re:ection of Eier8eNs genossenchaft theory) A corp as 8nown to $hil)
=.rispr.dence is a creat.re wJo any eistence .ntil it has received the imprimat.r of
the state acting according to law) 4t is logically inconceivable therefore that it will
have rights and privileges of a higher priority than that of its creator) 9ore than that
it cannot legitimately ref.se to yield obedience to acts of its state organs, certainly
not ecl.ding the :.diciary, whenever called .pon to do so)
- %orporate by5laws m.st yield to :.dicial order
- As a matter of fact, a corp) once it comes into being comes more often wJn the 8en
of the :.diciary than the other two coordinate branches) 4t instit.tes the appropriate
co.rt action to enforce its right) %orrelatively, it is not imm.ne from :.dicial control
in those instances, where a d.ty .nder the law as ascertained in an appropriate legal
proceeding is cast .pon it)
.5 T!&'(y ', E%t&($("3& E%t"ty 'B"R&", %heor& of "nterprise "ntit&, *6 %O&) &) R"V) 1*1
K1,*6L-
- :.ridical personality
- contract.al relation between + or more individ.als
- recogni?e eistence of an aggregation of individ.als 'enterprise entity-
A corporation is b.t an association of individ.als, allowed to transact .nder an
ass.med corporate name, and with a distinct legal personality) 4n organi?ing itself as a
collective body, it waives no constit.tional imm.nities and per7.isites appropriate to s.ch
a body) PS" v. Court of !ppeals, 201 S%RA 212 '1,,6-)
%orporations are composed of nat.ral persons and the legal fiction of a separate
corporate personality is not a shield for the commission of in:.stice and ine7.ity, s.ch as
to avoid the eec.tion of the property of a sister company) %an Boon Bee # Co., 'nc. v.
)arencio, 131 S%RA 22+ '1,00-)
+
5. 6';( C'($'()t& Att("7;t&3 B)3&- '% S&.t"'% 2+
5
A5 A CORPORATION IS AN ARTI6ICIAL BEING '@!bilit& to Contract and %ransactA-
5 a person created by law or by state# a legal fiction
5
B5 CREATED BY OPERATION O6 LAW '@Creature of the LawA-
- its eistence is dependent .pon the consent or grant of the state "B%"$/ corporation
by estoppel and de facto corporation
b
C5 WITH RIGHT O6 SUCCESSION '@Strong )uridical Personalit&A-
- the corporation eist despite the death of its members as a corporation has a
personality separate and distinct from that of its individ.al stoc8holders) /he separate
personality remains even if there has been a change in the members and stoc8holders
of the corporation)
o
D5 HAS THE POWERS, ATTRIBUTES AND PROPERTIES E:PRESSLY AUTHORI=ED BY LAW OR INCIDENT TO ITS
E:ISTENCE '@Creature of Limited PowersA-
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4)5 6';( B)3". A-1)%t)9&';3 C!)().t&("3t".3 ', C'($'()t& O(9)%">)t"'%+
4"5 STRONG LEGAL PERSONALITY
@A corporation is an entity separate and distinct from its stoc8holders) <hile not
in fact and in reality a person, the law treats the corporation as tho.gh it were a
person by process of fiction or by regarding it as an artificial person distinct and
separate from its individ.al stoc8holders)A *emo, )r. v. '!C, 162 S%RA *2+ '1,0,-)
/he transfer of the corporate assets to the stoc8holder is not in the nat.re of a
partition b.t is a conveyance from one party to another) aStoc+holders of ,. -uan.on
and Sons, 'nc. v. *egister of /eeds of Manila, 3 S%RA 161 '1,32-)
S/O%OMO&G"RS OF F) EUA(PO( I SO(S 4nc) v R"E4S/"R OF G""GS
Facts;
4n 1,32, five stoc8holders of F) E.an?on I Sons, 4nc) eec.ted a certificate of li7.idation of the
assets of the corporation which provided that d.e to the resol.tion of the stoc8holders dissolving the
corporation, they have distrib.ted among themselves in proportion to their shareholdings, as
li7.idating dividends, the assets of said corporation incl.ding real properties located in 9anila) /he
certificate of li7.idation was denied registration by the Register of Geeds and one of the gro.nds is
that the :.dgment of the corporation in approving dissol.tion and directing opposition of assets of
the corporation need to be presented aside from the following; '1- the n.mber of parcels which were
not certified in the ac8nowledgement '2- $*12)+2 registration fees have to be paid '1- $,2)*+
doc.stamps need to be attached) Stoc8holders contend that it was not conveyance b.t a mere
distrib.tion of corporate assets after the corporation ceased to eist .pon dissol.tion)
4ss.e; <O( the certificate merely involves a distrib.tion of the corporate assets or sho.ld be
considered a transfer or conveyance)
Meld;
/he S.preme %o.rt agrees with the Register of Geeds and the &and Registration %ommission) A
corporation is a :.ridical person distinct from the members composing it) $roperties registered in the
name of the corporation are owned by it as an entity separate and distinct from its members) <hile
shares of stoc8 constit.te personal property, they do not represent property of the corporation) /he
corporation has property of its own which consist mainly of real estates) A share of stoc8 only typifies
an ali7.ot part of the corporationNs property or the right to share in the proceeds to that etent when
distrib.ted according to law and e7.ity) B.t its holder is not the owner of any part of the capital nor
Revised Bagtas Reviewer by Ve and Ocfe 2A
is he entitled to the possession of any definite portion of its property or assets) /he stoc8holder is not
a co5owner or tenant in common of the corporate property) /h.s, the act of li7.idation made by the
stoc8holders of the corporationNs assets cannot be considered as a partition of the comm.nity
property b.t rather a transference or conveyance of the title of its assets to the individ.al
stoc8holders in proportion to their stoc8holdings) /herefore, said transfer cannot be effected witho.t
the corresponding deed of conveyance from the corporation to the stoc8holders)
4""5 CENTRALI=ED MANAGEMENT
As can be gleaned from Sec) 21 of %orporation %ode @4t is the board of directors
or tr.stees which eercises almost all the corporate powers in a corporation)A ,irme
v. Bu+al "nterprises and /ev. Corp., *1* S%RA 1,2 '2221-)
/he eercise of the corporate powers of the corporation rest in the Board of
Girectors save in those instances where the %orporation %ode re7.ires stoc8holdersN
approval for certain specific acts) -reat !sian Sales Center Corp. v. Court of !ppeals,
101 S%RA ++6 '2222-)
4"""5 LIMITED LIABILITY TO INVESTORS AND O66ICERS
One of the advantages of the corporation is the limitation of an investorNs
liability to the amo.nt of investment, which flows from the legal theory that a
corporate entity is separate and distinct from its stoc8holders) San )uan Structural
and Steel ,abricators, 'nc. v. Court of !ppeals, 2,3 S%RA 311 '1,,0-)
4t is hornboo8 law that corporate personality is a shield against personal liability
of its officersQa corporate officer and his spo.se cannot be made personally liable
.nder a tr.st receipt where he entered into and signed the contract clearly in his
official capacity) Consolidated Ban+ and %rust Corp. v. Court of !ppeals, 1+3 S%RA
361 '2221-)
Obligations inc.rred by the corporation acting thro.gh its directors, officers and
employees, are its sole liabilities) Mala&ang Samahan ng mga Manggagawa sa M.
-reenfield v. *amos, 1+6 S%RA 66 '2221-)
4"15 6REE TRANS6ERABILITY O6 UNITS O6 OWNERSHIP 6OR INVESTORS
A.thority granted to corporations to reg.late the transfer of its stoc8 does not
empower the corporation to restrict the right of a stoc8holder to transfer his shares,
b.t merely a.thori?es the adoption of reg.lations as to the formalities and
proced.re to be followed in effecting transfer) %homson v. Court of !ppeals, 2,0
S%RA 202 '1,,0-)
475 D"3)-1)%t)9&3+
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'i- Strong &egal $ersonality
5 entity attrib.table powers#
5 contin.ity of eistence#
'i- Ab.se of corporate
management
- there is
severance of
control and
6
having the right of
s.ccession, the
death of an
individ.al
stoc8holder does
not affect corporate
eistence
not a nat.ral
occ.rrence, eists
mainly beca.se the
law provides for it)
/his is what
disting.ishes the
separate :.ridical
personality of a
corporation from a
partnership) /he
legal personality of
a corp is strong
beca.se the law
provides for the
right of s.ccession,
s.rviving even wJo
those who
incorporated it
while in a
partnership the
separate :.ridical
personality is
eting.ished .pon
the death of a
partner
no delect.s
personar.m
'ii- &imited &iability of 4nvestors ' provided
for by :.rispr.dence only-
- the liability of an investor is
limited their investments
and investors cannot be held
acco.ntable for more than
what they invested)
- %&V; Mowever there are a
lot of ways to circ.mvent the
law and ma8e the
shareholders liable for more
than his act.al investment
'e) A creditor re7.iring the
chairmn or president of the
company as a :oint debtor of
the loan-
- A trade5off to the abdication
made by the investor of his
right to manage the property
he had invested in the
ownership)
%ontrol will be
vested with
the BoG, th.s
investors
have no say
over the .se
of their
investment
and little
voice in the
cond.ct of
the b.siness
'ii- Ab.se of limited liability
feat.re
- this feat.re
had been
ab.sed and
may h.rt
innocent
creditors)
'ii- %ost of maintenance
- the formation
and
incorporation
of a corp)
entails a lot of
diffic.lties
and costs,
partic.larly
the
re7.irements
made by the
law so as to
7.alify for
incorporation)
'iv- Go.ble taation
Gividends received by
individ.als from domestic
corporations are s.b:ect to
final 12R ta for income
earned on or after 1
=an.ary 1,,0 'Sec) 2*'B-
'2-, 1,,6 (4R%-
4nter5corporate
dividends between
domestic corporations,
however, are not s.b:ect
to any income ta 'Sec)
26'G-'*-, 1,,6 (4R%-
Revised Bagtas Reviewer by Ve and Ocfe 2A
company) Under property
law, a person eercises f.ll
ownership over his property
b.t when he invests it in a
corporation, the owner
abdicated the si @:.sA of
ownership
'iii- Free /ransferability of shares
- A legal relationship is
created which is more stable
for there are laws which
govern, and the corp) and
the stoc8holders are bo.nd
by the law)
'iv- %entrali?ed 9anagement
- One of the advantages of a
corp) is the limitation of an
investorNs liability, this flows
from the legal theory that a
corp) entity is separate and
distinct from its stoc8holders
4n addition, there is re5
imposition of the 12R
@improperly acc.m.lated
earnings taA for holding
companies 'Sec) 2,, 1,,6
(4R%-
C) 4s a corp) in o.r :.risdiction given the feat.re of limited liabilityD
A) (o) /he feat.re of limited liability is given to the stoc8holder and not to the corporation)
C) 4s limited liability a normal r.n of thingsD
A) (o) 4t is only there beca.se in this case, it comes with the separate :.ridical personality)
C) 4f limited liability as shown in a corporation setting good for the investors, does it mean that
delect.s personar.m is a bad thingD
A) (o) 4t is good in one way, since persons are bo.nd by the contracts they enter into)
?. COMPARED WITH OTHER BUSINESS MEDIA
4 Distribution of Risk, Profit and Control 3
)5 S'#& P('$("&t'(3!"$3
Sole $roprietorship %orporation
Free from many re7.irements and
reg.lations in its operation
Meavily reg.lated# a lot of
re7.irements imposed for registration
and incorporation
Owner has f.ll control of his b.siness %ontrol of b.siness is done by the
,
%&V; /he principle in constit.tional law that delegated power cannot be delegated f.rther has no application in a corporate setting beca.se a corp) is not a prod.ct of political contet > it is a prod.ct of b.siness) A corporate setting is best described as hierarchical and fiat) =.st beca.se the BoG are to be elected by the stoc8holders does not mean that the former derives its powers from the latter) /he powers of the BoG is original, said powers are not delegated by the stoc8holder) /he powers are vested by law 'and by the Ao4-) /he BoG sit on the board not as representatives of the stoc8holders b.t beca.se they are directors)
BoG
Owner stands to lose more than
what he p.ts into the vent.re
4nvestors have limited liabilty
475 P)(t%&(3!"$3 )%- Ot!&( A33'.")t"'%3 'Arts) 1630 and 166+, %ivil %ode-
Art) 1630 /he partnership has a :.ridical capacity separate and distinct from that of each of
the partners, even in case of fail.re to comply with re7.irements of Art) 1662 first
paragraph)
Art) 166+ Association and societies, whose articles are 8ept secret among the members, and
wherein any pone of the members may contract in his own name with third persons, shall
have no :.ridical personality, and shall be governed by the provisions relating to co5
ownership
%orporation $artnership
Separate legal personality Separate legal personality
4nvestors limited liability %ontract.al limited liability ' when a
limited partnership is created-
Free transfer of shares /ransfer with consent of partner
%entrali?ed management "very partner is agent
C) Mow does the contract.al management of a corp) compare with the management of a
partnershipD
A) "very partner, in the absence of a stip.lation in the articles of partnership, binds the
partnership as every partner is an agent of the others 'delect.s personar.m-) 4n a
corporation, only the BoG and not the stoc8holders can bind the corporation)
C) <hat are the 2 types of partnershipsD
A) Reg.lar and =oint vent.re
C) %an a corporation be a partner in a reg.lar partnershipD
A) (o) Beca.se a partner m.st be a nat.ral person) 4t is against p.blic policy for corporation to be a
partner in a reg.lar partnership)
C) 4f limited liability is something that can be contracted in a partnership, why did the legislat.re p.t
s.ch limited liability as an attrib.te of a corporationD 4f the feat.re of limited liability cots money
then why not ta8e it o.tD <hy not eave it .p to the investors who can decide if they want limited
liability or notD
A) "ven tho.gh limited liability will cost a lot of money, borrowing ma8es a lot more sense) 4f 4 have
P"'%&&( "%3;()%.& @ S;(&ty .'($. 13. CA 4 ?5 SCRA <<A5
Revised Bagtas Reviewer by Ve and Ocfe 2A
$1229, it wo.ld be foolish to p.t all my eggs in one bas8et 'if the bas8et falls, all eggs brea8-) So, 4
merely p.t $129 in one corporation and then borrow the $,29 while the rest of my money 4 pt
somewhere else) 4f the corporation fails, 4 do not lose all my $1229, 4 lose only my $129) B.t if the
corp) s.cceeds and 4 get to pay my creditor, 4 retain the $129 pl.s the profits ac7.ired from the
$,29 paid .p loan) /his is the concept of &"V"RAE4(E, .sing other peopleNs money to ma8e a profit
for yo.rself) /his is why borrowing is an integral part of corporate life and it is .p to the creditors to
ma8e a diligent appraisal of the credit standing of the corp)
C) <hat is the main distinction between a corporation and a partnershipD
A) A corp) is an intermingling of corporation law and contract law) On the other hand, a partnership
is p.rely a contract.al relationship and so every time a partner dies, the contract is act.ally
eting.ished)
C) <hat is %orporation &aw all abo.tD
A) 4t is all abo.t :.rispr.dence act.ally b.ilt aro.nd the * attrib.tes of a corporation
C) %an a defective attempt to form a corporation res.lt at least in a partnershipD
!. Pioneer 'nsurance v. Court of !ppeals, 16+ S%RA 330 '1,0,-# Lim %ong Lim v. Philippine ,ishing
-ear 'ndustries, 'nc., 116 S%RA 620 '1,,,-)
6).t3+
- 4n 1,3+, =acob S) &im was engaged in the airline b.siness as owner of So.thern
Airlines, a single proprietorship)
- On 9ay 16, 1,3+, he bo.ght from =apan Gomestic Airlines for the sale of 2 aircrafts
and one set f necessary spare parts for the total price of S12,,22) Both arrived in
9anila
- On 9ay, 22 1,3+, $ioneer 4ns.rance %orp, as s.rety eec.ted and iss.ed its s.rety
bond in behalf of &im, principal, for the balance price for the aircrafts and spare
parts)
- Border 9achinery and Meavy "7.ipment 'BOR9AM"%O-, the %ervanteses and
%onstancia 9aglana contrib.ted some f.nds in the p.rchase of the above aircrafts
and spare parts) /he f.nds were s.pposed to be their contrib.tions to anew
corporation proposed by &im to epand his airline b.siness) /hey eec.ted
indemnity agreements in favor of $ioneer, one signed by 9aglana and the other
:ointly signed SA&, BOR9AM"%O and %ervantes; where they principally agree and
bind themselves :ointly and severally to indemnify pioneer)
- On =.ne 12, 1,3+ &im for SA& eec.ted in favor of $ioneer a deed of chattel
mortgage as sec.rity for the s.retyship in favor of $ioneer) /he deed was d.ly
registered with the 9anila RoG and with the %ivil Aerona.tics Administration)
- &im defa.lted on his s.bse7.ent installments prompting =GA to re7.est payment
from the s.rety) $ioneer paid abo.t $2,0,222
- $ioneer filed for an etra5:.dicial foreclos.re of the mortgage b.t the %ervanteses
11
and 9aglana filed a third party complaint claiming that they are co5owners of the
aircraft) $ioneer later filed a petition for :.dicial foreclos.re and an application for a
writ of preliminary attachment against &im, the %ervanteses, BOR9AM"%O and
9aglana)
- 4n their answer, the %ervanteses, BOR9AM"%O and 9aglana alleged they were not
privy to the contracts signed by &im)
- /he R/% r.led in favor of $ioneer, holding &im liable b.t dismissing the case as to the
other defendants) On appeal, the %A affirmed)
ISSUE+ whether or not the %ervanteses, BOR9AM"%O and 9aglana are entitled to reimb.rsement of
amo.nts given by &imD
HELD+
&imNs assertions; /he fail.re of respondents to incorporate, a de facto partnership
among them was created, and that as a conse7.ence of s.ch relationship all m.st share in
the losses andJor gains of the vent.re in proportion to their contrib.tion)
$R4(%4$&"S; $ersons who attempt, b.t fail, to form a corporation and who carry on b.siness .nder
the corporate name occ.py the position of $AR/("RS 4(/"R S") /h.s, where persons associate
themselves together .nder articles to p.rchase property to carry on a b.siness, and their
organi?ation is so defective as to come short of creating a corp) wJn the stat.te, they become in legal
effect partners inter se, and their rights as members of the company to the property ac7.ired by the
company will be recogni?ed)
Mowever, s.ch a relationship does not eist, for ordinary persons cannot be made to ass.me
the relation of partners, as between themselves, when their p.rpose is that no partnership shall eist
and sho.ld be implied only when necessary to do :.stice between the parties; th.s, one who ta8es
no part ecept to s.bscribe for stoc8 in a proposed corporation which is never legally formed does
not become a partner with other s.bscribers who engage in b.siness .nder the name of the
pretended corp), so as to be liable as s.ch in an action for settlement of the alleged partnership and
contrib.tion)
- the records show that &im received the amo.nt of $1+1,222 representing the
participation of BOR9AM"%O and 9aglana
- it was clear that &im never intended to form a corp with them b.t they were d.ped
into giving their money
- no de facto corp) was created
C) 4n cases where there is a defective attempt to form a corp) which is the prevailing r.le, a
partnership inter se is created or a corporation by estoppelD
A) 4t depends wholly on the etent of the participation of the party on who a claim is being mind) 4n
the case at bar, there was no intent on the other parties to enter into a partnership b.t a corporation)
As to the %ervanteses I BOR9AM"%O, they cannot be considered to have entered even into a
partnership inter se, since there was no intention to do so and to be held liable as s.ch)
B.t if it were the %ervanteses or BOR9AM"%O, who entered into the contracts .sing the
corporate name and actively participated in the activities of the corporation, then they are to be held
liable as partners)
C) <hy are we ta8ing .p $ioneerD <hy were they not liableD
A) Beca.se $ioneer shows .s that for a person to be liable as a partner, he sho.ld have actively
participated in the cond.ct of the b.siness, the S% held in this case that to be able to be held liable
the person sho.ld possess powers of management)
Revised Bagtas Reviewer by Ve and Ocfe 2A
C) <hat is the difference between $ioneer and &im /ong &imD
A) 4n the case of $ioneer, the S% stopped when it declared that to be liable, yo. have to possess
powers of management) 4n &im tong &im, it contin.es its prono.ncement, by saying that if yo. have
beneficial ownership over the b.siness, then yo. are also liable as a partner)
LIM TONG LIM 1. PHILIPPINE 6ISHING GEAR INDUSTRIES
Facts; Antonio %h.a and $eter Hao on behalf of Ocean C.est Fishing %o) entered into a contract with
$hil) Fishing Eear 4nd.stries 4nc) for the p.rchase of fishing nets and floats) /hey claimed that they
were a fishing vent.re with &im /ong &im who was however not a signatory to the contract) /hey
failed to pay and so $FE4 filed a collection case with a prayed for a writ of preliminary attachment)
/he case was filed against %h.a, Hao and &im beca.se it was fo.nd that Ocean C.est was a non5
eistent corporation as shown by the certification from S"%) %h.a admitted liability and Hao waived
his right to cross5eamine and present evidence beca.se he failed to appear while &im filed a
co.nterclaim and a cross5claim) %o.rt granted the writ of attachment and ordered the A.ction Sale
of the FJB &o.rdes which was previo.sly attached) /rial co.rt r.led that $FE4 was entitled to the <rit
and %h.a, Hao and &im were :ointly liable as general partners)
Meld;
1)- &im was contesting that the %A r.led that there was a partnership in the %ompromise
Agreement and alleges that he had no direct participation in the negotiations and was merely
leasing FJB &o.rdes to %h.a and Hao Facts fo.nd by the /% and %A showed that there was
a partnership formed by the three of them) /hey initially p.rchased two boats thro.gh a loan
from &imNs brother and as sec.rity, was placed in the name of &im /ong &im) /he repairs and
s.pplies were sho.ldered by %h.a and Hao) A civil case was filed by %h.a and Hao against &im
for n.llity of commercial doc.ments, reformation of contracts and declaration of ownership of
fishing boatsTwhich was settled amicably) 4n the %ompromise Agreement, it was revealed
that they intended to pay the loan from =es.s &im by selling the boats and to divide among
them the ecess or loss) /herefore it was clear that a partnership eisted which was not solely
based on the agreement) 4t was merely an embodiment of the relationship among parties)
2)- &im alleges that he was merely a &"SSOR by showing the %ontract of &ease and registration
papers of the boats, incl.ding FJB &o.rdes where the nets were fo.nd As fo.nd by the
lower co.rts, the boats were registered to &im only as sec.rity for the loan that was granted
to the partnership by the brother of &im, which was not an .ncommon practice) Aside from
the fact that it was abs.rd for &im to sell the boats to pay the debt he did not inc.r, if needed
he was merely leasing the boats to %h.a and Hao)
1)- &im contests his liability by saying that only those who dealt in the name of the ostensible
corporation sho.ld be held liable) Mis name was not in any of the contracts and never dealt
with $FE4 Sec) 21 > All persons who ass.me to act as a corporation 8nowing it to be witho.t
a.thority to do so shall be liable as general partners for all debts, liabilities and damages
inc.rred or arising as a res.lt thereof# $rovided however that when any s.ch ostensible
corporation is s.ed, on any transaction entered by it as a corporation or ant tort committed
by it as s.ch, it shall not be allowed to .se as a defense its lac8 of corporate personality) "ven
if the ostensible corporate entity is proven to be non5eistent, a party may be estopped from
denying its corporate eistence beca.se an .nincorporated association has no personality
and wo.ld be incompetent to act and appropriate for itself the power and attrib.tes of a
corporation as provided by law) 4t cannot create agents or confer a.thority on another to act
on its behalf) /h.s, those who act or p.rport to act as its representatives do so witho.t
a.thority and at their own ris8) %learly, &im benefited from the .se of the nets fo.nd inside
FJB &o.rdes which was proved to be an asset of the partnership) Me in fact 7.estioned the
attachment beca.se it has effectively interfered with the .se of the vessel) /ho.gh
technically, he did not directly act on behalf of the corporation, however, by reaping the
benefits of the contract entered into by persons he previo.sly had an eisting relationship
11
with, he is deemed part of said association and is covered by the doctrine of corporation by
estoppel)
%&V; $ioneer case actors who 8new of corporationNs non5eistence are liable as general partners
while actors who did not 8now are liable as limited partners, passive investors are not liable# &im
teaches .s that even passive investors sho.ld be held liable provided they benefited from s.ch
transactions)
4.5 8'"%t V&%t;(&3
)oint venture is an association of persons or companies :ointly .nderta8ing some
commercial enterprise# generally all contrib.te assets and share ris8s) 4t re7.ires a
comm.nity of interest in the performance of the s.b:ect matter, a right to direct and
govern the policy in connection therewith, and d.ty, which may be altered by agreement
to share both in profit and losses) 0ilosba&an, 'nc. v. -uingona, )r., 212 S%RA 112 '1,,*-)
C) <hat is the difference between a :oint vent.re and a partnershipD
A) A :oint vent.re is by law a partnership beca.se it follows the same definition as having two or
more persons binding themselves together .nder a common f.nd with the intention of dividing the
profits between themselves) /herefore, every :oint vent.re is a partnership) /he distinction between
the two is that a :oint vent.re is for a limited p.rpose only while a partnership involves an
arrangement or an on5going concern)
C) 4s it possible for a :oint vent.re not to be a partnershipD
A) Hes) <hen the :oint vent.re forms a corporation, it then becomes a :oint vent.re corporation)
C) Goes the re7.irement of registration needed in a partnership also re7.ired in a :oint vent.reD
A) (o) Only in a partnership is registration re7.ired 'Art) 1662, %ivil %ode-
4-5 C''$&()t"1&3 'Art) 1, R)A) (o) 3,10-
A cooperative is a d.ly registered association of persons, with a common bond of
interest, who have vol.ntarily :oined together to achieve a lawf.l common social or
economic end, ma8ing e7.itable contrib.tions to the capital re7.ired and accepting a fair
share of the ris8s and benefits of the .nderta8ing in accordance with .niversally accepted
cooperative principles)
%ooperatives are established to provide a strong social and economic organi?ation to
ens.re that the tenant5farmers will en:oy on a lasting basis the benefits of agrarian
reforms) Corpu. v. -rospe, 111 S%RA *2+ '2222-)
%ooperative %orporation
Separate =.ridical $ersonality
Eoverned by principles of
democratic control where the
members have e7.al voting rights
on a one5member5one vote principle
SM vote their percentage share of
the stoc8s s.bscribed by them
BoG manage the affairs of the coop)
B.t it is the EA of f.ll membership
that eercises all the rights and
performs all of the obligations of the
BoG is the repository of all powers
"B%"$/ for acts where the %orp)
%ode re7.ires conc.rrence or
Revised Bagtas Reviewer by Ve and Ocfe 2A
coop) ratification by the SM
Under the s.pervision of the coop)
Gevelopment A.thority
Under the S.pervision of the S"%
Organi?ed for the p.rpose of
providing goods and services to its
members and th.s to enable them
to attain increased income and
saving, etc)
Stoc8 %orp) for profit# (on5Stoc8
%orp eleemosynary 'charitable,
philantrophic- p.rpose
&5 B;3"%&33 T(;3t3 'Article 1**2, %ivil %ode-
Art) 1**2
C) <hat is the difference between a b.siness tr.st and a corporationD
A) /he relationship in a b.siness tr.st is essentially a tr.st relationship) /he b.siness tr.st does not
have a personality which is apart from the tr.stor or the tr.steeJbeneficiary) /he concept of a
separate :.ridical personality is absent from a b.siness tr.st)
4,5 Sociedades Annimas
A sociedad annima was considered a commercial partnership @where .pon the
eec.tion of the p.blic instr.ment in which its articles of agreement appear, and the
contrib.tion of f.nds and personal property, becomes a :.ridical personQan artificial
being, invisible, intangible, and eisting only in contemplation of lawQwith power to hold,
b.y, and sell property, and to s.e and be s.edQa corporationQnot a general
copartnership nor a limited copartnership ) ) ) /he inscribing of its articles of agreement in
the commercial register was not necessary to ma8e it a :.ridical personQa corporation)
S.ch inscription only operated to show that it partoo8 of the form of a commercial
corporation)A Mead v. McCullough, 21 $hil) ,+ '1,11-)
/he sociedades annimas were introd.ced in $hilippine :.risdiction on 1 Gecember
1000 with the etension to $hilippine territorial application of Articles 1+1 to 1+, of the
Spanish %ode of %ommerce) /hose articles contained the feat.res of limited liability and
centrali?ed management granted to a :.ridical entity) B.t they were more similar to the
"nglish :oint stoc8 companies than the modern commercial corporations) Benguet
Consolidated Mining Co. v. Pineda, ,0 $hil) 611 '1,+3-)
O.r %orporation &aw recogni?es the difference between sociedades annimas and
corporations and will not apply legal provisions pertaining to the latter to the former) Phil.
Product Co. v. Primateria Societe !non&me, 1+ S%RA 121 '1,3+-)
495 Cuentas En Participacion
A cuentas en participacion as a sort of an accidental partnership constit.ted in s.ch a
manner that its eistence was only 8nown to those who had an interest in the same, there
being no m.t.al agreement between the partners, and witho.t a corporate name
indicating to the p.blic in some way that there were other people besides the one who
ostensibly managed and cond.cted the b.siness, governed .nder Article 21, of the %ode
of %ommerce)
/hose who contract with the person .nder whose name the b.siness of s.ch
partnership of cuentas en participacion is cond.cted, shall have only a right of action
against s.ch person and not against the other persons interested, and the latter, on the
other hand, shall have no right of action against third person who contracted with the
1+
manager .nless s.ch manager formally transfers his right to them) Bourns v. Carman, 6
$hil) 116 '1,23-)
III. NATURE AND ATTRIBUTES O6 A CORPORATION
. N)t;(& ', P'*&( t' C(&)t& ) C'($'()t"'% 'Sec) 13, Article B44, 1,06 %onstit.tion-
/he %ongress shall not ecept by general law, provide for the formation, organi?ation or
reg.lation of private corporations, Eovernment5owned or controlled corporations may be
created or established by special charters in the interest of the common good and s.b:ect to
the test of economic viability)
$)G) 1616, which created (ew Agri, 4nc) violates the %onstit.tion which prohibits the
formation of a private corporation by special legislative act which is neither owned nor
controlled by the government, since (G% was merely re7.ired to etend a loan to the new
corporation, and the new stoc8s of the corporation were to be iss.ed to the old investors and
stoc8holders of the insolvent Agri .pon proof of their claims against the abolished
Revised Bagtas Reviewer by Ve and Ocfe 2A
corporation) /C v. Philippine 1eterans Ban+, 1,2 S%RA 2+6 '1,,2-)
%ongress cannot enact a law creating a private corporation with a special charter, and it
follows that %ongress can create corporations with special charters only if s.ch corporations
are government5owned or controlled) ,eliciano v. Commission on !udit, *1, S%RA 131 '222*-)
C; <hat disting.ishes a p.blic corporation from a private corporation owned by the
governmentD A; 4t is not ownership which disting.ishes a p.blic
corporation from a private corporation) 4t is the civil service eligibility of its employees and if
the financial records are s.b:ect to the eamination of the %ommission on A.dit) A p.blic
corporation is created by its charter whereas a private corporation is created .nder the
%orporation %ode)
2. CORPORATION AS A PERSON+
4)5 E%t"t#&- t' D;& P('.&33
/he d.e process cla.se is .niversal in its application to all persons witho.t regard to
any differences of race, color, or nationality) $rivate corporations, li8ewise, are @personsA
within the scope of the g.aranty insofar as their property is concerned) Smith Bell # Co. v.
atividad, *2 $hil) 113, 1** '1,22-)
475 EB;)# P('t&.t"'% C#);3& 'Smith Bell # Co. v. atividad, *2 $hil) 113 K1,22L-)
4.5 U%(&)3'%)7#& S&)(.!&3 )%- S&">;(&
A corporation is protected by the constit.tional g.arantee against .nreasonable
searches and sei?.res, b.t its officers have no ca.se of action to assail the legality of the
sei?.res, regardless of the amo.nt of shares of stoc8 or of the interest of each of them in
said corporation, and whatever the offices they hold therein may be, beca.se the
corporation has a personality distinct and separate from those of said officers) Stonehill v.
/io+no, 22 S%RA 101 '1,36-)
A corporation is b.t an association of individ.als .nder an ass.med name and with a
distinct legal entity) 4n organi?ing itself as a collective body it waives no constit.tional
imm.nities appropriate for s.ch body) 4ts property cannot be ta8en witho.t compensation#
can only be proceeded against by d.e process of law# and is protected against .nlawf.l
discrimination)

Bache # Co. 2Phil.3, 'nc. v. *ui., 16 S%RA 021, 016 '1,61-, 4uoting from
Hale v. Hen+el, 221 U)S) *1, +2 &)"d) 3+2)
C; <hy is a corporation entitled to the rights of d.e process and e7.al protectionD
%&V; A corporation en:oys constit.tional rights) 4n that manner, it en:oys the same protection
the law grants to an individ.al) A corporation is entitled to d.e process and e7.al protection
by virt.e of the :.ridical personality given by the State thro.gh the primary franchise of the
corporation) /he constit.tion did not disting.ish whether the term @personA in Sec) 1 Art) 444 of
the %onstit.tion refers to an individ.al or a :.ridical entity, which therefore etends to private
corporations within the scope of the g.aranty)
C; <hy is the corporation entitled to the protection against .nreasonable searches and
sei?.resD A; /he corporation being entitled to d.e process and e7.al
protection is the conse7.ence of the StateNs grant of a primary franchise to a corporation) 4t
emanates from the /heory of %oncession, whereby the government recogni?es not only the
separate :.ridical personality of the corporation b.t also grants .nto it all the rights and
protections that a nat.ral individ.al wo.ld possess which incl.des the right to d.e process
and e7.al protection)
Mowever, a corporation is also entitled to protection against .nreasonable searches
and sei?.res) /his right however does not emanate from the grant of the State by way of
primary franchise b.t is so.rced thro.gh the /heory of "nterprise "ntity which recogni?es that
regardless of Section 2 of the %orporation %ode, a corporation is still for all intents and
p.rposes an association of individ.als .nder an ass.med name and with a distinct legal
personality) 4n organi?ing itself as a collective body, it waives no constit.tional imm.nities for
s.ch body) '1- 4ts properties cannot be ta8en witho.t :.st compensation '2- it can only be
proceeded against by d.e process of law '1- it is protected against .nlawf.l discrimination)
16
4n the same line of reasoning, altho.gh a corporation is a legal fiction, a search and
sei?.re involves physical intr.sion into the premises of the corporation, and therefore also
intr.des into the personal and b.siness privacy of the stoc8holders or members who compose
it) 4t can be seen that the right of the individ.al against .nreasonable searches and sei?.res is
etended to corporations .pon whom they are members)
4-5 B;t N't E%t"t#&- t' P("1"#&9& A9)"%3t S&#, "%.("/"%)t"'%
@4t is elementary that the right against self5incrimination has no application to :.ridical
persons)A Bataan Ship&ard # "ngineering v. PC--, 1+2 S%RA 101 '1,06-)
<hile an individ.al may lawf.lly ref.se to answer incriminating 7.estions .nless
protected by an imm.nity stat.te, it does not follow that a corporation, vested with
special privileges and franchises, may ref.se to show its hand when charged with an
ab.se of s.ch privilege) Hale v. Hen+el, 221 U)S) *1 '1,23-# 5ilson v. 6nited States, 221
U)S) 131 '1,11-# 6nited States v. 5hite, 122 U)S) 3,* '1,**-)
C; <hy is a corporation entitled to e7.al protection b.t not the right against self5
incriminationD A; Any individ.al is entitled to e7.al protection whether
they be :.ridical or nat.ral) /he corporation being in the same class sho.ld be treated e7.ally)
Mowever, the right to self5incrimation is not etended to corporation beca.se;
1) /he right is meant to prevent individ.als from having to lie .nder oath in order to protect
his interest) 4t is to protect the individ.al from having to commit per:.ry :.st to 8eep
himself from going to :ail) Mowever, if a corporation lies .nder oath, who wo.ld yo. bring
to :ail when in fact, a corporation is :.st a legal fiction)
2) /he corporation is s.b:ect to the reportorial re7.irements of the law) /he corporation
being a mere creat.re of the State is s.b:ect to the whims of its %reator) /he corporation
powers are limited by law)
%&V; Beats meU $erhaps s.ch right is attrib.table to the moral dimension of an individ.al, and
since the corporation is of an amoral personality, s.ch right may not be attrib.table to it)
0. P().t".& ', P(',&33"'%
%orporations cannot engage in the practice of a profession since they lac8 the moral and
technical competence re7.ired by the $R%)
A corporation engaged in the selling of eyeglasses and which hires optometrists is not
engaged in the practice of optometry) Samahan ng 7ptometrists v. !cebedo 'nternational
Corp., 262 S%RA 2,0 '1,,6-# !lfafara v. !cebedo 7ptical Compan&, 101 S%RA 2,1 '2222-)
4. L")7"#"ty ,'( T'(t3
A corporation is civilly liable in the same manner as nat.ral persons for torts, beca.se the
r.les governing the liability of a principal or master for a tort committed by an agent or
servant are the same whether the principal or master be a nat.ral person or a corporation,
and whether the servant or agent be a nat.ral or artificial person) /hat a principal or master is
liable for every tort which he epressly directs or a.thori?es, is :.st as tr.e of a corporation as
a nat.ral person) aPB v. Court of !ppeals, 01 S%RA 216 '1,60-)
$(B v %OUR/ OF A$$"A&S
Facts;
Rita E.eco /apnio had an eport s.gar 7.ota of 1,222 pic.ls for the agric.lt.ral year 1,+35
1,+6) Since, she did not need it, she agreed to allow 9r) =acobo /.a?on to .se the said 7.ota
for consideration of 2,+22) Mer s.gar cannot be eported witho.t s.gar 7.ota allotments)
Sometimes, however a planter harvests less s.gar than her 7.ota so her ecess 7.ota is .sed
by her mother who pays for it) /his is her arrangement with 9r) /.a?on) At the time of the
agreement, she was indebted to $(B of San Fernando, $ampanga) Mer indebtedness was
8nown as a crop loan and was sec.red by her s.gar crop, and since her 7.ota was mortgaged
to $(B, her arrangement with 9r) /.a?on had to be approved by the ban8) Upon presentment
of the lease arrangement, the $(B branch manager revised it by increasing the lease amo.nt
Revised Bagtas Reviewer by Ve and Ocfe 2A
to $2)02 per pic.l for a total of $2,022) S.ch increase was agreed to by both Rita and =acobo)
Mowever, when it was presented to the Board of Girectors for approval, they f.rther increased
the amo.nt to $1)22 per pic.l) =acobo as8ed for the reconsideration b.t he was denied the
same) /he matter stood as it was .ntil =acobo informed Rita and $(B that he had lost interest
in p.rs.ing the deal) 4n the meantime, the debt of Rita with the $(B mat.red) Since she had a
s.rety agreement with the $hilippine American Eeneral 4ns.rance %o) 4nc) '$hilamgen-, the
latter paid her o.tstanding debt) $hilamgen in t.rn demanded from Rita the amo.nt which
they paid the ban8) 4nstead of paying the ban8, Rita claimed that she told $hilamgen that she
did not consider herself indebted to the ban8 since she had an agreement with =acobo
/.a?on) <hen s.ch was discontin.ed, she failed to reali?ed the income with which she co.ld
have paid her creditors) $hilamgen filed a complaint for the collection of s.m of money
against Rita) Rita implicated $(B as a third party defendant claiming that her fail.re to pay
was d.e to the fa.lt or negligence of $(B)
4ss.e; <O( $(B is liable for the damage ca.sed to Rita)
Meld;
/here is no 7.estion that RitaNs fail.re to .tili?e her s.gar 7.ota was d.e to the
disapproval of the lease by the Board of Girectors of the petitioner, th.s $(B sho.ld be
held liable)
/he Board :.stified the increase to $ 1)22 per pic.l by saying that it was the prevalent rate
at that time) Mowever, there was no proof that any other person was willing to lease the
s.gar 7.ota allotment of Rita for a price higher than $2)02 per pic.l) =.st beca.se there
are isolated transactions where the lease price was $1)22 per pic.l does not mean that
there are always ready ta8ers)
<hile $(B had the .ltimate a.thority of approving or disapproving the proposed lease
since the 7.ota was mortgaged to the ban8, the latter certainly cannot escape its
responsibility of observing preca.tion and vigilance which the circ.mstances of the case
:.stly demanded in approving or disapproving the lease of said s.gar 7.ota)
According to Art) 1, of the %ivil %ode, @KeLvery person m.st in the eercise of his rights
and the performance of his d.ties, act with :.stice, give everyone his d.e and observe
honesty and good faith)A /his the petitioner failed to do) As a conse7.ence, Art) 21 states,
KaLny person who willf.lly ca.ses loss or in:.ry to another in a manner that is contrary to
morals, good c.stoms or p.blic policy shall compensate the latter for the damage)
On the liability of the corporation, the co.rt r.led that, @KaL corporation is civilly liable in
the same manner as nat.ral persons for torts, beca.se generally spea8ing, the r.les
governing the liability of a principal or master for a tort committed by an agent or servant
are the same whether the principal or master be a nat.ral person or artificial person) All of
the a.thorities agree that a principal or master is liable for every tort which he epressly
directs or a.thori?es, and this is :.st as tr.e of a corporation as of a nat.ral person) A
corporation, is liable therefore, whenever a tort.o.s act is committed by an officer or
agent .nder epress direction or a.thority from the stoc8holders or members acting as a
body, or generally, from the directors as the governing body)
(O/"; %&V tells .s that it is clear from the r.ling of the %o.rt in this case that not every
tort.o.s act committed by an officer can be ascribed to the corporation as its liability, for it is
reasonable to pres.me that in the granting of a.thority by the corporation to its agent, s.ch a
grant did not incl.de a direction to commit tort.o.s acts against third parties) Only when the
corporation has epressly directed the commission of s.ch tort.o.s act, wo.ld the damages
res.lting therefrom be ascribable to the corporation) And s.ch a direction by the corporation,
is manifested either by its board adopting a resol.tion to s.ch effect, as in this case, or
having ta8en advantage of s.ch a tort.o.s act the corporation, thro.gh its board, epressly
or impliedly ratifies s.ch an act or is estopped from imp.gning s.ch an act)
O.r :.rispr.dence is wanting as to the definite scope of @corporate tort)A "ssentially,
@tortA consists in the violation of a right given or the omission of a d.ty imposed by law# a
breach of a legal d.ty) /he fail.re of the corporate employer to comply with the law5imposed
d.ty .nder the &abor %ode to grant separation pay to employees in case of cessation of
1,
operations constit.tes tort and its stoc8holder who was actively engaged in the management
or operation of the b.siness sho.ld be held personally liable) Sergio ,. aguiat v. L*C, 23,
S%RA +3* '1,,6-)
C; <hen is a corporation liable for tortD
A; A corporation is liable for tort when; 'a- the act is committed by an officer or agent '2- .nder
epress direction of a.thority from the stoc8holders or members acting as a body or thro.gh the
Board of Girectors)
C; Mow can a.thority given to the agent of the corporation be determinedD
A; "ither by; 'a- s.ch direction by the corporation is manifested, by its board adopting a
resol.tion to s.ch effect 'b- by having ta8ien advantage of s.ch a tortio.s act, the corporation
thro.gh its board, has epressly or impliedly ratified s.ch an act or estopped from imp.gning the
same)
C; <hat is a derivative s.itD
A; Since, the act of the board is essentially that of the corporation and therefore corporate assets
cannot escape enforcement of the award of damage to the tort victim) As a remedy, the
stoc8holders may instit.te a derivative s.it against the responsible board members and officers
for the damages s.ffered by the corporation as a res.lt of the tort s.it)
5. C'($'()t& C("/"%)# L")7"#"ty 'a5est Coast Life 'ns. Co. v. Hurd, 26 $hil) *21 '1,1*-# aPeople
v. %an Boon 0ong, +* $hil) 326 K1,12L# aSia v. Court of !ppeals, 121 S%RA 3++ K1,01L# Articles
122 and 121, Revised $enal %ode-)
<"S/ %OAS/ &4F" 4(S) %O) v MURG
Facts;
/he petitioner '<est %oast- is a life5ins.rance corporation, organi?ed .nder the laws of %alifornia,
doing b.siness reg.larly and legally in the $hilippines) An information was filed against the
plaintiff corporation as well as =ohn (orthcott and 9an.e Erey charging the said corporation and
said individ.als with the crime of libel) /he controversy started when (orthcott, as general
manager for the $hilippines of said company and =ohn Erey who was an agent and employee of
the company, conspired to release certain circ.lars containing fo.l statements against 4ns.lar &ife
%ompany claiming that the 4ns.lar &ife was then and there in a dangero.s financial condition on
the point of going into insolvency, to the detriment of the policy holders of the said company, and
of those with whom said company have and had b.siness transactions) /he plaintiffs then filed a
motion to 7.ash s.mmons sent by the =.dge, on the gro.nd that the co.rt had no :.risdiction
over said company, there being no a.thority in co.rt for the iss.ance of the processes) 9oreover,
plaintiffs alleged that .nder the laws of the $hilippines, the co.rt has no power or a.thority to
proceed against a corporation, criminally, to bring it into co.rt for the p.rpose of ma8ing it
amenable to criminal laws)
4ss.e; <O( corporations can be held criminally liable)
Meld;
(o) <hile the co.rts have inherent powers which .s.ally go with co.rts of general :.risdiction, it
was held that .nder circ.mstances of their creation, they have only s.ch a.thority in criminal
matters as is epressly conferred .pon them by stat.te or which is necessary to imply from s.ch
a.thority in order to carry o.t f.lly and ade7.ately the epress a.thority conferred) /he S% did
not feel that %o.rts have a.thority to created new proced.re and new processes of criminal law)
Altho.gh, there are vario.s penal laws in the $hilippines which the corporation may violate, still
the S% does not believe that the co.rts are a.thori?ed to go to the etent of creating special
proced.re and processes for the p.rpose of carrying o.t the penal stat.tes, when the legislative
itself has neglected to do so) /his is tr.e since the co.rts are creat.res of the stat.te and have
only powers conferred .pon them by stat.te) $hilippines co.rts have no common law :.risdiction
Revised Bagtas Reviewer by Ve and Ocfe 2A
or powers)
$"O$&" v /A( BOO( OO(E
Facts;
G.ring 1,2*, in 4loilo, /an Boon Oong as manager of the Visayan Eeneral S.pply %o) engaged in
the p.rchase and sale of s.gar, bayon, copra, and other native prod.cts and as s.ch m.st pay
internal reven.e taes .pon is sales) Mowever, he only declared 2)1 million in sales b.t in
act.ality the sales amo.nted to 2)+ million, therefore failing to declare for the p.rpose of taation
abo.t 222,222, not having paid the government 2,222 in taes) Upon filing by the defendant of a
dem.rrer, the lower co.rt :.dge s.stained said motion on the gro.nd that the offense charged
m.st be regarded as committed by the corporation and not its officials)
4ss.e; <O( the defendant as manager may be held criminally liable)
Meld; R.ling reversed) %ase remanded)
/he co.rt held that the :.dge erred in s.staining the motion beca.se it is contrary to a great
weight of a.thority) /he co.rt pointed o.t that, a corporation can act only thro.gh its officers and
agents where the b.siness itself involves a violation law, the correct r.le is that all who
participate in it are criminally liable) 4n the present case, /an Boon Oong allegedly made a false
ret.rn for p.rposes of taation of the total amo.nt of sales for year 1,2*) As s.ch, the filing of
false ret.rns constit.tes a violation of law) Mim being the a.thor of the illegal act m.st be held
liable)
S4A v $"O$&"
Facts;
/he facts reveal that in 1,31, the acc.sed =ose Sia was the general manager of 9etal
9an.fact.ring %ompany of the $hilippines engaged in the man.fact.ring of steel office
e7.ipment) <hen the company was in need of raw materials to be imported from abroad, Sia
applied for a letter of credit to import steel sheets from /o8yo, =apan, the application being
directed to %ontinental Ban8 and was opened in the amo.nt of S10,122) According to the
%ontinental Ban8, the delivery of the steel sheets was only permitted .pon the eec.tion of the
tr.st receipt) <hile according to Sia, the steel sheets were already delivered and were even
converted to e7.ipment before the tr.st receipt was signed by him) Mowever, there is no
7.estion that when the bill of echange became d.e, neither the acc.sed nor his company made
payments, despite demands of the ban8) On appeal, Sia contends that he sho.ld not be held
liable)
4ss.e; <O( petitioner Sia may be liable for the crime charged, having acted only for and in behalf
of his company)
Meld;
(O) /he %o.rt disp.ted the reliance of the lower co.rt and the %A on the general principle that for
a crime committed by a corporation, the responsible officers thereof wo.ld personally bear the
criminal liability, as en.nciated in /an Boon Oong) /he latter provides that; @KtLhe corporation was
directly re7.ired by law to do an act in a given manner and the same law ma8es the person who
fails to perform the act in the prescribed manner epressly liable criminally) /he performance of
an act is an obligation directly imposed by the law on the corporation) Since it is a responsible
officer or officers of the corporations who act.ally perform the act for the corporation, they m.st
of necessity be the ones to ass.me the criminal liability# otherwise this liability as created by the
law wo.ld be ill.sory, and the deterrent effect of the law, negated)
/he %o.rt concl.ded that the cited case does not fall s7.arely with the circ.mstances
s.rro.nding Sia since the act alleged to be a crime is not in the performance of an act directly
ordained by law to be performed by the corporation) /he act is imposed by the agreement of the
parties in p.rs.it of the b.siness) /he intention of the parties is therefore a factor determinant of
whether a crime or a civil obligation alone is committed) /he absence of a provision of the law
21
even in the R$% ma8ing Sia criminally liable as the president of his company created a do.bt that
m.st be r.led in his favor according to the maim, that all do.bts m.st be resolved in favor of the
acc.sed)
%O(/RAS/4(E /M" /MR"" %AS"S
4n the case of <est, the co.rt in effect en.nciated that for a person to proceed criminally
against a corporation, it was necessary that epress provisions of law be enacted, specifically
providing that a corporation may be proceeded against criminally and bro.ght to co.rt)
B.t since a corporation is a legal fiction that cannot be handc.ffed and bro.ght to co.rt, the
case of /an Boon Oong provided that since a corporation acts thro.gh its officers and agents,
any violation of law by any of the actors of the corporation in the cond.ct of its b.siness
involves a violation of law, the correct r.le is that all who participate in it are liable) 4n ma8ing
actors liable, the co.rt here said attaching criminal liability to the fiction cannot be done
since; '1- a corporation is only an artificial person '2- there is a lac8 of intent imp.table to a
being since it lac8s its own mind)
/o apply the doctrine of separate :.ridical personality wo.ld allow criminals to .se the
corporation as a shield or cloa8 to hide their criminal activities behind s.ch)
Mowever, the liability of officers were delineated in case of Sia where the co.rt held that the
responsible officer is personally liable is personally liable for crimes committed by the
corporation only in a sit.ation where the corporation was directly re7.ired by law to do an act
in a given manner, and the same law ma8es the person who fails to perform the act in the
prescribed manner epressly liable criminally)
(O/"; <hile the law only defines individ.als as offenders of criminal acts or as criminal actors,
the law is c.rrently .ndergoing changes s.ch that :.ridical persons are also defined as offenders
of criminal acts, as with the case of the Anti59oney &a.ndering Act)
Art) 122 of the R$%; S.bsidiary civil liability of inn8eepers, tavern58eepers and proprietors of
establishments > 4n defa.lt of the persons criminally liable, inn8eepers, tavern58eepers and
any other person or corporations shall be civilly liable for crimes committed in their
establishments, in all cases where a violation of m.nicipal ordinances or some general or
special police reg.lation shall have been committed by them or their employees)
4nn8eepers are also s.bsidiarily liable for the restit.tion of goods ta8en by robbery or
theft within their ho.ses from g.ests lodging therein, or for the payment of the val.e
therefore, provided that s.ch g.ests shall have notified in advance the inn8eeper himself, or
the person representing him, of the deposit of s.ch goods within the inn# and shall
f.rthermore have followed the directions which s.ch inn8eeper or his representative may
have given them with respect to the care of and vigilance over s.ch goods) (o liability shall
attach in case of robbery with violence against or intimidation of persons .nless committed
by the inn8eeperNs employees)
Art) 121 of the R$%; S.bsidiary civil liability of other persons > /he s.bsidiary liability
established in the net preceding article shall also apply to employers, teachers, persons and
corporations engaged in any 8ind of ind.stry for felonies committed by their servants, p.pils,
wor8men, apprentices, or employees in the discharge of d.ties)
(o criminal s.it can lie against an acc.sed who is a corporation) %imes, 'nc. v. *e&es, 1,
S%RA 121 '1,61-)
<hen a criminal stat.te forbids the corporation itself from doing an act, the prohibition
etends to the board of directors, and to each director separately and individ.ally) People v.
Concepcion, ** $hil) 12, '1,22-)
<hile it is tr.e that a criminal case can only be filed against the officers and not against
the corporation itself, it does not follow that the corporation cannot be a real5party5in5interest
for the p.rpose of bringing a civil action for malicio.s prosec.tion for the damages inc.rred
by the corporation for the criminal proceedings bro.ght against its officer) Cometa v. Court of
!ppeals, 121 S%RA *+, '1,,,-)
Revised Bagtas Reviewer by Ve and Ocfe 2A
C; <hy can the corporation be held liable for tort.o.s acts done by its agent b.t not for
criminal acts done o.tside its a.thorityD
A; %rime is not within the corporate contemplation while negligence is) (egligence co.ld be
part of every transaction) 4t is an integral part of corporate transactions) For as long as people
comprise the corporation, it is within the contemplation of every corporate act)
<. R&.'1&(y ', M'()# )%- Ot!&( D)/)9&3
A corporation, being an artificial person, cannot eperience physical s.fferings, mental
ang.ish, fright, serio.s aniety, wo.nded feelings, moral shoc8 or social h.miliation which are
basis for moral damages .nder Art) 2216 of the %ivil %ode) However, a corporation ma& have
a good reputation which, if besmirched, ma& be a ground for the award of moral damages)
Mambulao Lumber Co. v. Philippine ational Ban+, 22 S%RA 1+, '1,30-# !P% v. Court of
!ppeals, 122 S%RA +6, '1,,0-.
A corporation, being an artificial person and having eistence only in legal contemplation,
has no feelings, emotions nor senses# therefore, it cannot eperience physical s.ffering and
mental ang.ish) 9ental s.ffering can be eperienced only by one having a nervo.s system
and it flows from real ills, sorrows, and griefs of lifeQall of which cannot be s.ffered by an
artificial person) Prime 5hite Cement Corp. v. '!C, 222 S%RA 121 '1,,1-# LBC "(press, 'nc. v.
Court of !ppeals, 213 S%RA 322 '1,,*-# !cme Shoe, *ubber # Plastic Corp. v. Court of
!ppeals, 232 S%RA 61* '1,,3-# Solid Homes, 'nc. v. Court of !ppeals, 26+ S%RA 236 '1,,6-#
PC v. Philipp Brothers 7ceanic, 'nc., 13, S%RA 32, '2221-)
/he statement in People v. Manero and Mambulao Lumber Co. v. PB, that a corporation
may recover moral damages if it @has a good rep.tation that is debased, res.lting in social
h.miliationA is an obiter dictum. *ecover& of a corporation would be under !rticles 89, :; and
:8 of the Civil Code, but which re4uires a clear proof of malice or bad faith. !BS<CB
Broadcasting Corp. v. Court of !ppeals, 121 S%RA +0, '1,,,-)
?. CORPORATE NATIONALITY+ UNDER WHSE !AWS "NCRPRA#ED 'Sec) 121-
Section 121; Gefinition and rights of foreign corporations > For the p.rposes of this %ode, a
foreign corporation is one formed, organi?ed or eisting .nder any laws other than those of
the $hilippines and whose laws allow Filipino citi?ens and corporations to do b.siness in the
$hilippines after it shall have obtained a license to transact b.siness in this co.ntry in
accordance with this %ode and a certificate of a.thority from the appropriate government
agency)
/here are three tests to determine the nationality of the corporation, namely;
1)- $lace of incorporation > that a corporation is of the nationality of the co.ntry .nder whose
laws it has been organi?ed and registered, embodied in Sec) 121 of the %orporation %ode)
2)- %ontrol test > nationality determined by the nationality of the ma:ority stoc8holders, wherein
control is vested)
Sit.ation V1; +1R Filipino *,R =apanese Under the control test, the nationality
cannot be determined beca.se for a gro.p of stoc8holders to eercise control over a
corporation it is re7.ired by the %orporation %ode that they at least control 32R of the
corporation) <hy 32RD Beca.se .nder the %orporation %ode for a gro.p of persons
to incorporate a corporation, at least + persons are re7.ired by law) A ma:ority of the +
is 1 and converting it into percent, one gets 32R) <e can say that in fact +1R is
ma:ority b.t in a gro.p of + people +1R is 2 I 1J+, there really is no 1J+ of a person)
Sit.ation V2; 32R Filipino *2R =apanese Under the control test, this is considered a
21
Filipino corporation)
1)- $rincipal place of b.siness > applied to determine whether a State has :.risdiction over the
eistence and legal character of a corporation, its capacity or powers, internal organi?ations,
capital str.ct.re, rights and liabilities of directors)
C; Go all three tests apply in the $hilippinesD
A; Hes) /he first test is considered the primary test, the second one is .sed to determine whether
a corporation can engage in nationali?ed activities in the co.ntry, and the third one is .sed to
determine the :.risdiction of the State to enforce for instance taation laws)
C; <hat is the importance of determining the nationality of the corporationD
A; 4t is necessary so as to determine whether or not a corporation can enter into vario.s
transactions or engage in different ind.stries) And also, the legal fiction s.pporting a corporation
is valid only within $hilippine territory)
C; 4t was said that the place of incorporation is the primary test to determine the nationality of
the corporation, why then are there other tests .sedD
A; /here are certain aspects of the $hilippine economy that re7.ire that the controlling test in
corporations engaging in said type of b.siness be that of Filipinos) /he nationali?ed economic
sectors are primarily foc.sed at ma8ing Filipino interests benefit directly from the bo.nties of this
co.ntry) /he place of incorporation test need not have been epressly provided by the
%onstit.tion since it is an integral part of o.r law specifically the power of %ongress to grant
primary franchise to corporations) /he place of incorporation test is deemed the primary test) 4t is
a tr.e test of nationality) Being a creat.re of law of the place where it was incorporated, the
corporation cannot escape said law) By providing for the control test, the %onstit.tion is providing
for a secondary test to determine which corporations are entitled to entry in nationali?ed sectors)
C; <hat is the implication of having a primary test and a secondary testD
A; Simply p.t, if a corporation does not pass the first test, which the place of incorporation test,
a.tomatically it is deemed to be a foreign corporation) Mowever, having passed the first test, the
nationality of the corporation may have been established b.t this does not mean that the
corporation is entitled to enter every single economic sector of the $hilippines) /he control test
determines now whether the corporation f.lfills the e7.ity re7.irements of the %onstit.tion) 4n
doing this, the other tests are made s.ch as; war5time test, investment test and grandfather r.le)
E:CEPTIONS + #ES# $ CN#R!!"N% WNERSH"P )#3' )$$#"&3 "%+
4)5 E&ploitation of Natural Resources 'Sec) 1*2# Sec) 2, Article B44, 1,06 %onstit.tion#
a*oman Catholic !postolic !dministrator of /avao, 'nc. v. %he L*C and the *egister of
/eeds of /avao, 122 $hil) +,3 K1,+6L-)
Sec) 1*2 Stoc8 ownership in certain corporations > $.rs.ant to the d.ties specified by
Article B4V of the %onstit.tion, the (ational "conomic Gevelopment A.thority shall,
from time to time, ma8e a determination of whether the corporate vehicle has been
.sed by any corporation of by b.siness or ind.stry to fr.strate the provisions thereof
or of applicable laws, and shall s.bmit to the Batasang $ambansa, whenever deemed
necessary, a report of its findings, incl.ding recommendations for their prevention or
correction)
9aim.m limits may be set by the Batasang $ambansa for stoc8holdings in
corporations declared by it to be vested with a p.blic interest p.rs.ant to the
provisions of this section, belonging to the individ.als or gro.ps of individ.als related
to each other by consang.inity or affinity or by close b.siness interests, or whenever it
is necessary to achieve national ob:ectives, prevent illegal monopolies or combinations
in restrain or trade, to implement national economic policies declared in laws, r.les
and reg.lations designed to promote the general welfare and foster economic
development)
Revised Bagtas Reviewer by Ve and Ocfe 2A
4n recommending to the Batasang $ambansa corporations, b.siness or ind.stries to be
declared vested with a p.blic interest and in form.lating proposals for limitations on
stoc8 ownership, the (ational "conomic and Gevelopment A.thority shall consider the
type and nat.re of the ind.stry, the si?e of the enterprise, the economies of scale, the
geographic location, the etent of Filipino ownership, the labor intensity of the activity,
the eport potential, as well as the other factors which are germane to the reali?ation
and promotion of b.siness and ind.stry)
Sec) 2 Art) B44
All lands of the p.blic domain, waters, minerals, coal, petrole.m and other mineral
oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fa.na
and other nat.ral reso.rces are owned by the State) <ith the eception of agric.lt.ral
lands, all other national reso.rces shall .nder the f.ll control and s.pervision of the
State) /he State may directly .nderta8e s.ch activities or it may enter into co5
prod.ction, :oint vent.re, or prod.ction5sharing agreements with Filipino citi?ens, or
corporations or associations at least sity percent.m of whose capital is owned by
s.ch citi?ens) S.ch agreements may be for a period not eceeding twenty5five years,
renewable for not more than twenty5five years, and .nder s.ch terms and conditions
as may be provided by law) 4n cases of water rights for irrigation, water s.pply,
fisheries, or ind.strial .ses other than the development of water power, beneficial .se
may be the meas.re and limit of the grant)
/he State shall protect the nationNs marine wealth in its archipelagic waters, territorial
sea, and ecl.sive economic ?one, and reserve its .se and en:oyment ecl.sively to
Filipino citi?ens)
/he %ongress may, by law, allow small5scale .tili?ation of nat.ral reso.rces by Filipino
citi?ens, as well as cooperative fish farming, with priority to s.bsistence fishermen and
fishwor8ers in rivers, la8es, bays and lagoons
/he $resident may enter into agreements with foreign5owned corporations involving
either technical or financial assistance for large5scale eploration, development and
.tili?ation of minerals, petrole.m and other mineral oils according to the general terms
and conditions provided by law, based on real contrib.tions to the economic growth
and general welfare of the co.ntry) 4n s.ch agreements, the State shall promote the
development and .se of local scientific and technical reso.rces)
/he $resident shall notify the %ongress of every contract entered into in accordance
with this provision within thirty days from its eec.tion)
RO9A( %A/MO&4% A$OS/O&4% AG94(4S/RA/OR OF GAVAO v /M" &R%
Facts;
9ateo Rodis, a Filipino citi?en and resident of Gavao, eec.ted a deed of sale of a parcel of
land located in the same city in favor of the Roman %atholic Administrator of Gavao, a
@corporation soleA organi?ed and eisting in accordance with $hilippine laws) /he inc.mbent
administrator is 9sgr) %lovis /hiba.lt, a %anadian citi?en) <hen the deed was presented to
the Register of Geeds for registration, it re7.ired them to s.bmit an affidavit stating that the
ownership of the corporation is 32R Filipino citi?ens as re7.ired .nder the %onstit.tion)
Roman %atholic stated that it was a corporation sole 'meaning only one incorporator- and that
the totality of the %atholic pop.lation in Gavao wo.ld become the owner of the property)
Register of Geeds do.bted this and s.bmitted the case for en consulta in the &and
Registration %ommission) &R% r.led that the re7.irement of the %onstit.tion m.st be followed
and since the 32R cannot be complied with, the registration sho.ld be denied) Mence, this
appeal)
4ss.e; <O( the Roman %atholic Apostolic %h.rch, being a corporation sole, can lawf.lly
ac7.ire lands in the $hilippines)
Meld; H"S)
%orporation sole > a special form of corporation .s.ally associated with the clergy
designed to facilitate the eercise of the f.nctions of ownership of the ch.rch which
2+
was registered as property owner) 4t is created not only to administer the temporalities
of the ch.rch or religio.s society where the corporator belongs, b.t also to hold and
transmit the same to his s.ccessor in said officer)
/he inc.mbent administrator is not the act.al owner of the land b.t the constit.ents
or those that ma8e .p the ch.rch, th.s it is their nationality that has to be ta8en into
consideration) /he corporation sole only holds the property in tr.st for the benefit of
the Roman %atholic faithf.l)
Gissenting opinion by =.stice =B& Reyes 4n re7.iring corporations or association to have
32R of their capital owned by Filipino citi?ens, the constit.tion manifestly disregarded the
corporate fiction i)e) the :.ridical personality of s.ch corporation or associations) 4t went
behind the corporate entity and loo8ed at the nat.ral persons that composed it, and
demanded that a clear ma:ority in interest '32R- sho.ld be Filipino) Since .nder the r.les
governing corporation sole, the members of the religio.s association cannot overr.le or
override the decisions of the sole corporator, then it wo.ld be wrong to concl.de that the
control of the corporation sole wo.ld be in the members of the religio.s association)
(O/"; /he Roman %atholic %h.rch is a corporation by prescription, with ac8nowledged
:.ridical personality inasm.ch as it is an instit.tion which antedated almost a tho.sand years
any other personality in ".rope, and which eisted when Erecian elo7.ence still flo.rished in
Antioch and when idiots were still worshipped in the temple of 9ecca) Since it is a corporation
by prescription, it has no nationality, and hence, the nationality test does not apply) 'B.t refer
to below)-
C; <hy is this case relevant to .sD
A; 4t is relevant beca.se while it tells .s that a corporation sole is not s.b:ect to the
nationality test, it m.st be f.rther 7.alified to mean that this is the case only insofar as the
control test is concerned) (ationality is irrelevant insofar as this test is concerned) Mowever, it
becomes relevant when the place of incorporation comes into play since the case never
so.ght to to.ch the place of incorporation test)
/he registration of the donation of land to an .nincorporated religio.s organi?ation,
whose tr.stees are foreigners, wo.ld violate constit.tional prohibition and the ref.sal
wo.ld not be in violation of the freedom of religion cla.se) /he fact that the religio.s
association @has no capital stoc8 does not s.ffice to escape the constit.tional inhibition,
since it is admitted that its members are of foreign nationality) ) ) and the spirit of the
Constitution demands that in the absence of capital stoc+, the controlling membership
should be composed of ,ilipino citi.ens)A *egister of /eeds of *i.al v. 6ng Sui Si %emple,
,6 $hil) +0 '1,++-)
475 Public Utilities 'Sec) 11, Art) B44, %onstit.tion# aPeople v. =uasha, ,1 $hil) 111-
Sec) 11 Art) B44
(o franchise, certificate or any other form of a.thori?ation for the operation of p.blic
.tility shall be granted ecept to citi?ens of the $hilippines or to corporations or
associations organi?ed .nder the laws of the $hilippines at least sity per centum of
whose capital is owned by s.ch citi?ens, nor shall s.ch franchise, certificate or
a.thori?ation be ecl.sive in character or for a longer period than fifty years) (either
shall any s.ch franchise or right be granted ecept .nder the condition that it shall be
s.b:ect to amendment, alteration or repeal by the %ongress when the common good
so re7.ires) /he State shall enco.rage e7.ity participation in p.blic .tilities by the
general p.blic) /he participation of foreign investors in the governing body of any
p.blic .tility enterprise shall be limited to their proportionate share in its capital, and
all the eec.tive and managing officers of s.ch corporation or association m.st be
citi?ens of the $hilippines)
(O/"; Stoc8 ownership m.st at least be 32R Filipino b.t management m.st be 122R
Filipino for s.ch corporation to operate in ind.stries concerning p.blic .tilities)
Revised Bagtas Reviewer by Ve and Ocfe 2A
$"O$&" v CUASMA
Facts;
<illiam C.asha, a member of the $hilippine Bar was charged with falsification of p.blic and
commercial doc.ments in the %F4) Me was entr.sted with the preparation and registration of
the articles of incorporation of $acific Airways %orporation b.t he ca.sed it to appear that
Arsenio Baylon, a Filipino had s.bscribed to and was the owner of 32R of s.bscribed capital
stoc8) S.ch was not case beca.se the real owners of said portions were really American
citi?ens) /he p.rpose of s.ch false statement was to circ.mvent the %onstit.tional mandate
that no corporation shall be a.thori?ed to operate as a p.blic .tility in the $hilippines .nless
32R of its capital is owned by Filipinos)
Meld;
/he falsification imp.ted to C.asha consists in not disclosing in the Articles of 4ncorporation
that Baylon was a mere tr.stee of the Americans, th.s giving the impression that Baylon
s.bscribed to 32R of the capital stoc8) B.t contrary to the lower co.rtNs ass.mption, the
%onstit.tion does not prohibit the mere formation of a p.blic .tility corporation witho.t the
re7.ired proportion of Filipino capital) <hat it does prohibit is the granting of a franchise or
other form of a.thori?ation for the operation of a p.blic .tility to a corporation already in
eistence b.t witho.t the re7.isite proportion of Filipino capital) From the lang.age of the
tet, the terms @franchiseA, @certificateA, and @other form of a.thori?ationA are 7.alified by the
phrase @for the operation of p.blic .tility)A As s.ch, these terms cannot and do not refer to the
corporationNs primary franchise, which vests a body of men with corporate eistence, b.t to its
secondary franchise, or the privilege to operate as p.blic .tility after the corporation has
already gone into being)
$rimary franchise refers to that franchise which invests a body of men with corporate
eistence, while the secondary franchise is the privilege to operate as a p.blic .tility after the
corporation has already come into being)
For the mere formation of the corporation, s.ch revelation was not essential and the
corporation law does not re7.ire it) /herefore, C.asha was .nder no obligation to ma8e it) 4n
the absence of s.ch obligation and of the alleged wrongf.l intent, C.asha cannot be legally
convicted of the crime with which he is charged) A corporation formed with capital that is
entirely alien may s.bse7.ently change the nationality of its capital thro.gh transfer of shares
to Filipino citi?ens) /he converse may also happen) /h.s for a corporation to be entitled to
operate a p.blic .tility, it is not necessary that it be organi?ed with 32R of its capital owned
by Filipinos from the start) Said condition, may at any time be attained thro.gh the necessary
transfer of stoc8s) /he moment for determining whether a corporation is entitled to operate as
p.blic .tility is when it applies for a franchise, certificate or any other form of a.thori?ation for
that p.rpose and that can only be done after the corporation has already come into being not
while being formed)
C; <hy are we st.dying C.ashaD
A; /his case ma8es a distinction with the grant by the government of primary and secondary
franchise) As far as doctrinal prono.ncements are concerned, any and all type of corporations
may be incorporated, so long as the re7.irements for incorporation are f.lfilled and that its
p.rpose is lawf.l and not contrary to law or p.blic policy) /he violation of e7.ity re7.irements
with regard to entry into nationali?ed sectors as provided by the %onstit.tion come only into
play when the secondary franchise is granted) 4n granting the secondary franchise
considerations of e7.ity are now made)
%&V; (ote that while C.asha ma8es s.ch doctrinal prono.ncements, in practice, this is not the
case) S"% will ref.se to register the Articles of 4ncorporation if it is not 32R owned by Filipinos)
4n fact, C.asha lied in order to have the articles registered)
26
/he primary franchise, that is, the right to eist as s.ch, is vested in the individ.als
who compose the corporation and not in the corporation itself and cannot be conveyed in
the absence of a legislative a.thority so to do) /he special or secondary franchises are
vested in the corporation and may ordinarily be conveyed or mortgaged .nder a general
power granted to a corporation to dispose of its property, ecept s.ch special or
secondary franchises as are charged with a p.blic .se) ).*.S. Business Corp. v. 'mperial
'nsurance, 11 S%RA 31* '1,3*-)
/he %onstit.tion re7.ires a franchise for the operation of a p.blic .tility# however, it
does not re7.ire a franchise before one can own the facilities needed to operate a p.blic
.tility so long as it does not operate them to serve the p.blic) /here is a clear distinction
between @operationA of a p.blic .tility and the ownership of the facilities and e7.ipment
.sed to serve the p.blic) a%atad v.-arcia, )r., 2*1 S%RA *13 '1,,+-)
/A/AG v EAR%4A
Facts
4n 1,0,, GO/% planned to constr.ct a light railway transit along "GSA) 4nitially, "li &evin
"nterprise 4nc) was s.pposed to constr.ct the &R/ 444 on a B.ild5Operate5/ransfer 'BO/- basis)
S.bse7.ently, RA 3,+6 was enacted which provides for two schemes for the financing,
constr.ction and operation of government pro:ects thro.gh private initiative and investment;
B.ild5Operate5/ransfer 'BO/- or B.ild5/ransfer 'B/-) GO/% iss.ed a Gepartment Orders
creating the $re57.alification Bids and Awards %ommittee) "GSA &R/ %onsorti.m composed of
12 foreign and domestic corporations, was one of the five gro.ps who responded to the
invitation) And being the sole complying bidder, it was awarded the contract) GO/% and "GSA
&R/ %orp), &td) in s.bstit.tion of the "GSA &R/ %onsorti.m entered into an @Agreement to
B.ild, &ease and /ransfer an &R/ system for "GSAA .nder the terms of the BO/ &aw)
Agreement was s.bse7.ently revised and another @S.pplemental AgreementA was also
contracted)
According to the agreements, the "GSA &R/ 444 '9R/- will .se light rail vehicles from abroad
'%?ech and Slova8 Federal Rep.blics- and will have a maim.m carrying capacity of *+2,222
passengers a day) 4t will have its own power facility and will have 11 passenger stations) /he
private respondent will finance the entire pro:ect re7.ired for a complete operational &R/
system) Upon f.ll or partial completion and viability, private respondent shall deliver the .se
and possession of the completed portion to GO/% which shall operate the same) GO/% shall
pay respondent monthly rentals, which is to be determined by an independent and
internationally accredited inspection firm) As agreed .pon, private respondentNs capital shall
be recovered from the rentals to be paid by GO/%, which in t.rn, shall come from the
earnings of the 9R/) After 2+ years and after the GO/% shall have completed payment of the
rentals, ownership of the pro:ect shall be transferred to the latter)
$etitioners arg.e that the Agreements, insofar as it grants "GSA &R/ %orp) &td), a foreign
corporation the ownership of 9R/, a p.blic .tility, violate the %onstit.tion) /hey claim that
since the 9R/ is a p.blic .tility, its ownership and operation is limited by the %onstit.tion to
Filipino citi?ens and domestic corporation, not foreign corporations, li8e private respondent)
GO/% Secretary and private respondent on the other hand, contend that the nationality
re7.irement for p.blic .tilities mandated by the %onstit.tion does not apply to private
respondent) Also, these Agreements were already approved by $resident Ramos)
4ss.e; <O( the Agreements violated the %onstit.tion 're; ownershipJoperation of a p.blic
.tility by a foreign corporation-)
Meld; (o)
4t is to be noted that what the private respondents own are the rail trac8s, rolling stoc8s li8e
the coaches, rail stations, terminals and power plant, which do not fall .nder @p.blic .tilityA)
<hile a franchise is needed to operate these facilities to serve the p.blic, they do not by
themselves constit.te a p.blic .tility) <hat constit.tes a p.blic .tility is not their ownership
b.t their .se to the p.blic) <hile the %onstit.tion re7.ires a franchise for the operation of
Revised Bagtas Reviewer by Ve and Ocfe 2A
p.blic .tility, it does not however re7.ire a franchise before one can own the facilities needed
to operate a p.blic .tility so long as it does not operate them to serve the p.blic) /here m.st
be a clear distinction between the @operationA of a p.blic .tility and the ownership of the
facilities and e7.ipments .sed to serve the p.blic) /he right to operate a p.blic .tility may
eist independently and separately from the ownership of the facilities witho.t operating
them as a p.blic .tility, or conversely, one may operate a p.blic .tility witho.t owning the
facilities .sed to serve the p.blic)
4n the case, while private respondent is the owner of the facilities necessary to operate the
9R/, it admits that it is not enfranchised to operate a p.blic .tility) 4n view of the incapacity,
private respondent "GSA %orp) and GO/% agreed that on completion date, private respondent
will deliver possession of the &R/ system by way of lease of 2+ years, d.ring which period
GO/% shall operate the same as common carrier and private respondent shall provide the
technical maintenance and repair services to GO/%)
4n s.m, private respondent will not r.n the light rail vehicles and collect fees from the riding
p.blic) 4t will have no dealings with the p.blic and the p.blic will have no right to demand any
services from it) A mere owner and lessor of the facilities .sed by a p.blic .tility is not a
p.blic .tility) "ven the mere formation of a p.blic .tility corporation does not ipso facto
characteri?e the corporation as one operating a p.blic .tility) /he moment for determining the
re7.isite Filipino nationality is when the entity applies for a franchise certificate or any other
form of a.thori?ation for that p.rpose)
C; Mow does the case of C.asha differ from the case of /atadD
A; C.asha tells .s that we have to loo8 at the secondary franchise, i)e) to whom s.ch is given
while /atad tells .s that it does not matter to whom the franchise is given b.t what matters is
who act.ally operates the .tility) /he latter case tells .s that restrictions are not on the assets
of the corporations b.t on the enterprise itself, th.s control determines nationality and not
the beneficiaries) %&V; /he %onstit.tion restricts the :.ridical person as it controls the
enterprise) (ote, that assets are different from the :.ridical person and from the b.siness
enterprise itself)
4.5 M)33 M&-") 'Sec) 11'1-, Art) BV4, 1,06 %onstit.tion-
Sec) 11'1- Art) BV4
/he ownership and management of mass media shall be limited to citi?ens of the
$hilippines, or to corporations, cooperatives or associations, wholly5owned and
managed by s.ch citi?ens)
/he %ongress shall reg.late or prohibit monopolies in commercial mass media when
the p.blic interest so re7.ires) (o combination in restraint of trade or .nfair
competition shall be allowed)
9ass media incl.des the gathering, transmission of news, information, messages,
signals and forms of written, oral and all vis.al comm.nication and shall embrace the
print medi.m, radio, television, films, movies, advertising in all its phases and their
b.siness managerial) 4t does not incl.de commercial telecomm.nications beca.se
s.ch is a p.blic .tility)
/he %onstit.tional re7.irements are m.ch stricter for it re7.ires that soc8s are 122R
Filipino owned and managed)
S';(.&3; $)G) 13, amended by $)G)s 1,1 and 1,6# GO= Opinion (o) 122, s) of 1,02# Sec) 2,
$)G) +63# S"% Opinion, 2* 9arch 1,01# GO= Opinion 131, s) 1,61# S"% Opinion, 1+
=.ly 1,,1, BBV S"% CUAR/"R&H BU&&"/4(, '(o) *QGecember, 1,,1-, at p) 11)
Cable "ndustr'+ @%able /V operations shall be governed by ")O) (o) 22+, s) 1,06) 4f
%A/V operators offer p.blic telecomm.nications services, they shall be treated :.st li8e a
p.blic telecomm.nications entity)A '(/% 9emo %irc.lar (o) 05,5,+-
%able /V as @a form of mass media which m.st, therefore, be owned and managed by
Filipino citi?ens, or corporations, cooperatives or associations, wholly5owned and managed
by Filipino citi?ens p.rs.ant to the mandate of the %onstit.tion)A 'GO= Opinion (o) ,+, s)
2,
1,,,, citing !llied Broadcasting, 'nc. v. ,ederal Communications Commission, *1+ F) 2d
62-)
/he (ational /elecomm.nications %ommission which reg.lates and s.pervises the
cable television ind.stry in the $hilippines .nder Sec) 2 of "O *13 series of 1,,6 has
provided .nder the (/% 9emorand.m %irc.lar (o) 05,5,+ .nder item ,22'a- thereof
provides that @KcLable /V operations shall be governed by ")&) (o) 22+ series of 1,06)
4f %A/V operators offer p.blic telecomm.nications services, they shall be treated :.st
li8e p.blic telecomm.nications ind.stry)A
Under GO= opinion (o) ,+ series of 1,,,, the Secretary of =.stice ta8ing its c.e from
!llied Broadcasting 'nc. v. ,ederal Communications Commission *1+ F)2d 62
considered %A/V as @a form of mass media, which m.st therefore be owned and
managed by Filipinos, or corporations, cooperatives or associations, wholly5owned and
managed by Filipino citi?ens p.rs.ant to the mandate of the %onstit.tion)A
4-5 A-1&(t"3"%9 B;3"%&33 'Sec) 11'2-, Art) BV4, 1,06 %onstit.tion-
Sec) 11'2- Art) BV4
/he advertising ind.stry is impressed with p.blic interest and shall be reg.lated by law for
the protection of cons.mers and promotion of the general welfare)
Only Filipino citi?ens or corporations or associations at least seventy percent.m of the
capital of which is owned by s.ch citi?ens shall be allowed to engage in the advertising
ind.stry)
/he participation of foreign investors in the governing body of entities in s.ch ind.stry
shall be limited to their proportionate share in the capital thereof, and all the eec.tive
and managing officers of s.ch entities m.st be citi?ens of the $hilippines)
Only Filipino citi?ens or corporations or associations at least seventy percent of the capital
shall be allowed to engage in the advertising ind.stry) 4t also provides that the
participation of foreign investors in the governing body shall be limited to their
proportionate share in the capital thereof, and all the eec.tive and managing officers of
s.ch entities m.st be citi?ens of the $hilippines)
4&5 W)(-T"/& T&3t ',ilipinas Compania de Seguros v. Christern, Huenefeld # Co., 'nc., 0,
$hil) +* K1,+1L# /avis 5inship v. Philippine %rust Co., ,2 $hil) 6** K1,+2L# Haw Pia v. China
Ban+ing Corp), 02 $hil) 32* K1,*0L-)
4n ,ilipinas Compania de Seguros v. Christern, Huenefeld # Co., 'nc., the %o.rt held that in
times of war, the nationality of a private corporation is determined by the character or
citi?enship of its controlling stoc8holders /he co.rt considered the :.ridical entity as an
enemy based on the fact that the @ma:ority of the stoc8holders of the respondent
corporation were Eerman s.b:ects)A 4t r.led that the control test was applicable only in
war5time) 4t ref.sed the sole application of the place of incorporation test d.ring the war5
time to determine the nationality of an enemy corporation)
4,5 I%1&3t/&%t T&3t as to @$hilippine (ationalsA 'Sec) 1'a- I 'b-, R)A) 62*2, Foreign
4nvestments Act of 1,,1-
Under Sec) 1a of the F4A of 1,,1, the term @$hilippine nationalA as it refers to a corporate
entity shall mean a corporation organi?ed .nder the laws of the $hilippines of which at
least 32R percent of the capital stoc8 o.tstanding and entitled to vote is owned and held
by citi?ens of the $hilippines) (O/"; 4n this aspect, F4A is more liberal than the %onstit.tion
which did not specify as to what type of share the 32R Filipino5ownership re7.irement
pertained to) F4A, in this aspect, only referred to voting shares)
Mowever, it provides that were a corporation and its non5Filipino stoc8holders own stoc8s
in a S"%5registered enterprise, at least 32R of the capital stoc8 o.tstanding and entitled
to vote of both corporations m.st be owned and held by citi?ens of the $hilippines and at
least 32R of the members of the Board of Girectors of both corporations m.st be citi?ens
of the $hilippines, in order that a corporation shall be considered a $hilippine national) /he
law therefore limits the test to voting shares, b.t however ma8es it more stringent when it
Revised Bagtas Reviewer by Ve and Ocfe 2A
comes to act.al control by ma8ing a do.ble 32R r.le re7.irement as to both holding and
held company, as well as their Board of Girectors)
C; <hy sho.ld not we infer that the 32R Filipino ownership re7.irement of the %onstit.tion as
pertaining to voting sharesD
A; "lementary r.le of Stat.tory %onstr.ction that when the law does not disting.ish, neither
sho.ld we) 9oreover, the right to vote is not the only right granted to stoc8holders, as the
right to file s.its against the Board of Girectors is granted to them)
C; Eiven these facts; AB% %ompany is comprised of 32R Filipino and 22R Foreign investors
with respect to voting stoc8s and *2R Foreign investors with respect to non5voting stoc8s,
.nder the F4A, is it a $hilippine nationalD
A; Hes, since F4A limits its scope to voting stoc8s)
C; Eiven these facts; AB% %ompany with 22 voting stoc8s is comprised of 02R Filipino '13-
and 22R Foreign '*-, is it a $hilippine nationalD %an it therefore own land .nder the
%onstit.tionD A; Hes, .nder F4A, it is a
$hilippine national b.t it cannot own land) As to the aspects that F4A r.ns contrary to the
%onstit.tion, which is the s.preme law of the land, the former shall not apply)
495 G()%-,)t!&( R;#& 'Opinion of GO= (o) 10, s) 1,0,, 1, =an.ary 1,0,# S"% Opinion, 3
(ovember 1,0,, BB4V S"% CUAR/"R&H BU&&"/4( '(o) 15 9arch 1,,2-# S"% Opinion, 1*
Gecember 1,0,, BB4V S"% CUAR/"R&H BU&&"/4( '(o) 2 5=.ne 1,,2-
Shares belonging to corporations or partnerships at least 32R of the capital of which is
owned by Filipino citi?ens shall be considered as of $hilippine nationality, b.t if the
percentage of Filipino ownership in the corporation or partnership is less than 32R, only
the n.mber of shares corresponding to s.ch percentage shall be co.nted as of $hilippine
nationality) "ample; partnership between AB% and B companies) AB% owns 32R with
*2R foreign and 32R Filipino5owned shares while B companie own *2R with 122R
Filipino5owned shares) Under the S"% GO= R.le, s.ch partnership is Filipino5owned)
9oreover, .nder this r.le once the 32R re7.irement is reached, there is no more need for
tierring)
4t m.st be stressed however that the afore7.oted S"% r.le applies only for p.rposes of
resolving iss.es on investments) /he S"% was 7.ic8 to add; @KhLowever, while a
corporation with 32R Filipino and *2R foreign e7.ity ownership is considered a $hilippine
national for p.rposes of investment, it is not 7.alified to invest in or enter into a :oint
vent.re agreement with corporations or partnerships, the capital or ownership of which
.nder the constit.tion of other special laws are limited to Filipino citi?ens only) A :oint
vent.re arrangement wo.ld mean that s.ch corporation has become a partner and is
deemed then to be acting or involving itself in the operations of a nationali?ed activity by
the acts of the local partners by virt.e of the principle of m.t.al agency applicable to
partnerships)
/here seems to be a conflict as to the applicability of the S"% R.le and to that of the
Foreign 4nvestments Act b.t each in itself has advantages and disadvantages, since both
re7.ire stringent re7.isites for a corporation to avail of its privileges) B.t .nder the
present scenario, the F4A is believed to be the defa.lt r.le having been enacted more
recently that the S"% R.le)
ERA(GFA/M"R RU&" > a method by which the percentage of Filipino e7.ity in corporations
engaged in nationali?ed or partly nationali?ed areas of activity provided for .nder the
%onstit.tion and other national laws is acc.rately comp.ted, in cases where corporate
shareholders are part of the ownership str.ct.re by considering the nationality of the
second or even s.bse7.ent tier of ownership to determine the nationality of the corporate
shareholder)
C; <hen is the EFR appliedD
A; /he EFR is applied in cases where the corporation has corporate stoc8holders with alien
stoc8holdings, otherwise, if the r.le is not applied, the presence of s.ch corporate
sroc8holders co.ld diminish the effective control of Filipinos)
11
S4/UA/4O( V1 > Silahis 4nternational Motel, the capital stoc8 of which is 3,R owned by
another corporation Motel $roperties 4nc) and 11R owned by Filipinos) Motel $roperties in
t.rn is +1R alien5owned and *6R Filipino5owned) /he S"% thro.gh the EFR stated that
Silahis 4nternational Motel can engage in partly nationali?ed b.siness beca.se the Filipino
e7.ity in said corporation is 31)*1R while the foreign e7.ity in said corporation is 13)+6R)
S4&AM4S 4(/"R(A/4O(A& MO/"&
Motel $roperties 4nc) 3,R 1)- +1R Foreign
*6R Filipino
Filipino stoc8holdings 11R
*6J122 'Motel $roperties- 3, W 12)*1 X 11 'remaining Filipino
stoc8holdings in Silahis-
/O/A&; 31)*1R
S4/UA/4O( V2 ><hether or not there may be an investment made by $inoy 4nc) in 9ass
9edia which re7.ires 122R Filipino ownership) $inoy 4nc) is *2R owned by $edro, a
Filipino, while 32R is owned by AB%, 4nc) AB% on the other hand, is a corporation
registered in the $hilippines 32R of which is owned by 9aria, a Filipino, while *2R is
owned by Eeorge, a Eerman)
C; %an $inoy, 4nc) enter into the operation of a television stationD
A; 4n this sit.ation, is the EFR is applied straight# $inoy, 4nc) wo.ld be dis7.alified since 2*R
of $inoy is owned by Eeorge) B.t .nder the present investment regime of the $hilippines, the
F4A provides that corporations which are 32R owned by Filipino citi?ens shall be considered of
$hilippine nationality) 4t is defined .nder said law that for the p.rposes of investment s.ch a
corporation of 32R Filipino and *2R foreign e7.ity is allowed to invest in a corporation
engaged in a nationali?ed sector)
C; Goes this not contradict the very provisions of the %onstit.tionD
A; 4t does not beca.se the main p.rpose of s.ch provision of the law is to sp.r investments
into the $hilippine economy) <hat it specifically prohibits is for a corporation with a foreign
e7.ity to engage in nationali?ed ind.stries) (ote the difference in the .se of terms, namely
@to engageA as opposed to @to invest)A "ngaging in nationali?ed ind.stries involve direct
participation in the eploitation or .se of nat.ral reso.rces or entry into protected ind.stries
vested with p.blic interest) /his is what is prohibited from being entered into by non5
nationals)
C; <hen sho.ld the EFR be appliedD
A; 4t sho.ld be applied when two re7.isites are met; '1- when there is involved a nationali?ed
or partly nationali?ed sector of $hilippine economy and '2- when there is tierring, meaning the
corporation is partly5owned by another corporation)
Up to ()at le*el do 'ou appl' t)e +randfat)er rule, 'aPalting v. San )ose
Petroleum 'nc., 10 S%RA ,2* K1,33L-
$A&/4(E v) SA( =OS" $"/RO&"U9
Facts;
San =ose $etrole.m filed with the S"% a sworn registration statement for the registration and
licensing for sale in he $hilippine voting tr.st certificate representing 2 million shares of its
capital stoc8 of a par val.e of S2)1+Jshare at $1Jshare) 4t was alleged that the proceeds
thereof will be .sed to finance the operations of San =ose Oil %o) which has 1* petrole.m
eploration concessions in vario.s provinces) 4t was epressly conditioned that instead of
stoc8 certificates, registered or bearer5voting tr.st certificates from voting tr.stees
'Americans- will be given) San =ose $etrole.m amended the application from $29 to $+9 at
Revised Bagtas Reviewer by Ve and Ocfe 2A
red.ced offering at $2)62Jshare)
$alting, et)al filed with the S"% an opposition to said registration on the following gro.nds; '1-
the tie5.p between S=$, a $anamanian corporation and S=O, a domestic corporation violates
the %onstit.tion, the %orp) &aw and the $etrole.m Act of 1,*, '2- the iss.er is not licensed to
transact b.siness in the $hilippines '1- the sale of shares is fra.d.lent '*- the iss.er is based
on .nso.nd b.siness principles 'sic-)
S=$ claimed that it was a @b.siness enterpriseA en:oying parity rights, with respect to mineral
reso.rces in the $hilippines, which may be eercised p.rs.ant to the &a.rel5&angley
Agreement, thro.gh a medi.m, the S=O) 4t contends that giving S=O financial assistance did
constit.te transaction of b.siness in the $hilippines)
S=O is a domestic corporation ,2R of which is owned by S=$, a $anamanian %orp) the ma:ority
interest of which is owned by Oil 4nvestments, 4nc) another $anamanian %orp) /he latter is in
t.rn owned by $antepec Oil %o) I $an%oastal $etrole.m, both organi?ed and eisting .nder
the laws of Vene?.ela)
Under the %onstit.tion, the eploitation of nat.ral reso.rces shall be limited to citi?ens of the
$hilippines or to corporations or associations at least 32R of the capital of which is owned by
s.ch citi?ens) Mowever, this right was earlier etended to US citi?ens by virt.e of the $arity
Agreement) Said US citi?ens can either directly or indirectly own or control the b.siness
enterprise)
Meld;
San =ose $etrole.m is not entitled to $arity Rights; '1- 4t is not owned or controlled directly by
US citi?ens beca.se it is owned and controlled by $anamanian corporation# '2- (either can it
be said that it is indirectly owned and controlled by US citi?ens beca.se the controlling
corporation is in t.rn owned by two Vene?.elan corporations# '1- Altho.gh the two
Vene?.elan corporations claim to be owned by stoc8holders residing in the US, there is no
showing that said stoc8holders were US citi?ens# '*- "ven granting that these stoc8holders
are US citi?ens, it is still necessary to establish that their different states allow Filipino
corporations and citi?ens to engage in the eploitation of nat.ral reso.rces) Mowever, there is
no s.ch proof to this# '+- /he word indirectly sho.ld not be .nd.ly stretched in application)
C; <hy are we st.dying $altingD
A; 4t is beca.se $alting en.nciated the doctrine that for a corporation to comply to the
nationali?ation re7.irements of the %onstit.tion, the e7.ity re7.irements establishing the
nationality of the controlling interest in the corporation sho.ld not be stretched to abs.rdity)
/he application of the EFR to determine the nationality of the .ltimate controller of a s.b:ect
corporation cannot go beyond the level of what is reasonable)
4!5 S$&.")# C#)33",".)t"'%3 'Sec) 1*2-
Sec) 1*2 Stoc8 ownership in certain corporations > $.rs.ant to the d.ties specified by
Article B4V of the %onstit.tion, the (ational "conomic Gevelopment A.thority shall,
from time to time, ma8e a determination of whether the corporate vehicle has been
.sed by any corporation of by b.siness or ind.stry to fr.strate the provisions thereof
or of applicable laws, and shall s.bmit to the Batasang $ambansa, whenever deemed
necessary, a report of its findings, incl.ding recommendations for their prevention or
correction)
9aim.m limits may be set by the Batasang $ambansa for stoc8holdings in
corporations declared by it to be vested with a p.blic interest p.rs.ant to the
provisions of this section, belonging to the individ.als or gro.ps of individ.als related
to each other by consang.inity or affinity or by close b.siness interests, or whenever it
is necessary to achieve national ob:ectives, prevent illegal monopolies or combinations
in restrain or trade, to implement national economic policies declared in laws, r.les
and reg.lations designed to promote the general welfare and foster economic
development)
4n recommending to the Batasang $ambansa corporations, b.siness or ind.stries to be
declared vested with a p.blic interest and in form.lating proposals for limitations on
11
stoc8 ownership, the (ational "conomic and Gevelopment A.thority shall consider the
type and nat.re of the ind.stry, the si?e of the enterprise, the economies of scale, the
geographic location, the etent of Filipino ownership, the labor intensity of the activity,
the eport potential, as well as the other factors which are germane to the reali?ation
and promotion of b.siness and ind.stry)
IV. SEPARATE 8URIDICAL PERSONALITY AND DOCTRINE O6 PIERCING THE VEIL O6
CORPORATE 6ICTION
See relevant portions of V4&&A(U"VA, *estatement of the /octrine of Piercing %he 1eil
of Corporate ,iction, 16 A/"("O &)=) 1, '(o) 2, =.ne 1,,1-)
IV. A. MAIN DOCTRINE+ A CORPORATION HAS A PERSONALITY SEPARATE AND DISTINCT 6ROM ITS
STOCKHOLDERS OR MEMBERS
. S';(.&3+ Sec) 2# Article **, %ivil %ode
Sec) 2 %orporation defined > A corporation is an artificial being created by operation of
law, having the right of s.ccession, and the powers, attrib.tes, and properties epressly
a.thori?ed by law or incident to its eistence)
Article ** /he following are :.ridical persons;
'2- other corporations, instit.tions and entities for p.blic interest or p.rpose,
created by law, their personality begins as soon as they have been constit.ted
according to law#
'1- corporations, partnerships and associations for private interest or p.rpose
to which the law grants a :.ridical personality, separate and distinct from that
of each shareholder, partner or member)
2. I/$'(t)%.& ', P('t&.t"%9 M)"% D'.t("%&+
/he separate :.ridical personality incl.des the right of s.ccession, limited liability,
centrali?ed management, and generally free transferability of shares of stoc8) /herefore,
an .ndermining of the separate :.ridical personality of the corporation s.ch as the
application of the piercing doctrine, necessarily dil.tes any or all of those attrib.tes)
FRO9 <M4%M A//R4BU/" OF /M" %OR$ORA/4O( GO"S /M" GO%/R4(" OF $4"R%4(E /M"
Revised Bagtas Reviewer by Ve and Ocfe 2A
V"4& OF %OR$ORA/" F4%/4O( FO%US O(D
1- %entrali?ed management > %entrali?ed management is not a nat.ral occ.rrence) 4t is a
creation of stat.te .nder Sec) 21 of the %orporation %ode %ompared to partnerships,
partnerships have m.t.al agency .nder delect.s personar.m) 9.t.al agency is more of a
nat.ral occ.rrence since here the partner is a co5owner of the assets of the partnership,
maintaining his control over his property) 4n property law, there is what is called the seven
:.ses of ownership) 4n partnership however, a partner retains all this seven :.ses, albeit as
a co5owner, thro.gh m.t.al agency) Mowever, in a corporation, a stoc8holder abdicates
his :.s dispossidendi, :.s ab.tendi, etc) as to the property he is placing inside a
corporation retaining only to himself his :.s fr.endi, as to the dividends of his stoc8s) /his
is .nnat.ral since a person is entitled to f.ll .se, en:oyment or dispossession of his
property) B.t since .nder the %orporation %ode, centrali?ed management is provided
therefore it is the means by which a corporation acts and cond.cts it b.siness) As s.ch,
the piercing doctrine is not directed at the attrib.te of centrali?ed management, beca.se
in most instances, investors in a corporation hand the management of the b.siness of the
corporation to professionals) /o do away with the central management wo.ld place the
investors who had ta8en no active part in the cond.ct of the corporation to be liable as
partners with m.t.al agency)
2- Free transferability of assets > Shares of stoc8 represent '1- right to profitsJdividends '2-
voting right '1- contingent right which recogni?es a proprietary right of a mere ali7.ot
share in the proceeds after dissol.tion and distrib.tion of corporate assets) /herefore a
stoc8holder is neither owner nor co5owner of assets of a corporation) /he assets of a
stoc8holder are distinct from the assets of a corporation) /he stoc8holders have no control
in the dispossession or ac7.isition of assets 'only as to their voting capacity in the
management of the corporation-) /he stoc8holders however have the right to freely
dispose of his shares of stoc8 to any and all person who may p.rchase it) /here the
corporation has no control) Applying the piercing doctrine as to the free transferability of
his assets cannot be done since :.rispr.dence points o.t that the piercing doctrine is a
remedy of last resort) 4f a third party claimant has a claim as to the assets to be disposed
of or ac7.ired by a corporation can be afforded in other remedies whether it be intra or
inter corporate)
1- &imited &iability and Separate &egal $ersonality > /herefore it can be concl.ded that the
piercing doctrine is directed at the limited liability attrib.te of the corporation 'in
consonance with the separate :.ridical personality attrib.te-)/he piercing doctrine in a
way .ndermines the separate :.ridical personality of a corporation allowing a party to loo8
behind the veil of corporate fiction to remedy a claim or fra.d) 4n loo8ing behind the veil, a
plaintiff see8s to ma8e somebody liable for a claim either based on tort, breach of
contract, etc) Since a corporation can only act thro.gh its agents# it is the same agents
that are to be held liable) /herefore the attrib.te of limited liability cannot be availed of in
a piercing case since it is this attrib.te that is .ndermined so as a wrong can be remedied)
%&V; 4n viewing the main doctrine of separate :.ridical personality as to the piercing doctrine,
the main doctrine act.ally pertains to e7.ity) "7.ity refers to the part of the rights or interest
an individ.al has in a corporation) "7.ity is comprised of two main parts which is '1-
enterprise and '2-assets) 4t is the enterprise or the cond.ct of the b.siness which in effect
.ndermines e7.ity) Assets are those bro.ght in by the stoc8holders d.ring the formation of
the corporation or may have been ac7.ired d.ring its eistence) /hey are inanimate ob:ects
that re7.ire h.man intervention to move or be .sed) /h.s, it can be said that it is not the
assets that .ndermine e7.ity which bring abo.t piercing) <hen an enterprise is cond.cted in
fra.d or in perpet.ation of a wrong the e7.ity of the corporation is .ndermined) Since, a
corporation m.st act thro.gh its agents, so the corporation being the principal, commissions
these agents to act .nder that special commission) 4f an agent acts beyond the commission of
the principal 'as provided .nder its by5laws- it is the actor that sho.ld be held liable not the
corporation, since the corporation for all of its :.ridical eistence is still abstract and a
corporeal actor acts for it) Also a corporation cannot .ndermine e7.ity, only the actors) So
when these actors .ndermine e7.ity, they lose limited liability and may be held liable)
/herefore, the basis of piercing is on the enterprise not on e7.ity or its assets) $iercing
reg.lates the enterprise of the corporation)
1+
A corporation, .pon coming into eistence, is invested by law with a personality separate
and distinct from those persons composing it as well as from any other legal entity to which
it may be related) /his separate and distinct personality is, however, merely a fiction
created by law for conveyance and to promote the ends of :.stice) LBP v. Court of !ppeals,
13* S%RA 16+ '2221-)
One of the advantages of a corporate form of b.siness organi?ation is the limitation of
an investorNs liability to the amo.nt of the investment) /his feat.re flows from the legal
theory that a corporate entity is separate and distinct from its stoc8holders) Mowever, the
stat.torily granted privilege of a corporate veil may be .sed only for legitimate p.rposes)
On e7.itable considerations, the veil can be disregarded when it is .tili?ed as a shield to
commit fra.d, illegality or ine7.ity# defeat p.blic convenience# conf.se legitimate iss.es# or
serve as a mere alter ego or b.siness cond.it of a person or an instr.mentality, agency or
ad:.nct of another corporation) aSan )uan Structural v. Court of !ppeals, 2,3 S%RA 311
'1,,0-)
SA( =UA( S/RU%/URA& A(G S/""& FABR4%A/ORS v) %A
Facts;
San =.an entered into an agreement with 9otorich for the transfer of a parcel of land) San
=.an paid a downpayment of 122,222, balance to be paid on or before 9arch 2, 1,0,) San
=.an re7.ested for the recomp.tation of the balance, 9otorichNs bro8er &inda Ad.ca wrote the
comp.tation) San =.an and 9otorich were s.pposed to meet in the office of San =.an b.t
9otorich treas.rer 9rs) Er.enberg did not appear) Gespite repeated demands and in .tter
disregard of its commitments had ref.sed toe eec.te the /ransfer of RightsJGeed of
Assignment which is necessary to transfer the certificate of title 'title was transferred to
spo.ses Er.enberg from A%& %orporation- Gefendants, president and chairman of 9otorich
did not sign the agreement) 9rs) Er.enbergNs signat.re as treas.rer is ins.fficient) San =.an
8new of this infirmity that is why it did not pay on time) /he R/% and %A held that 9rs)
Er.enberg did not have the a.thority as she did not obtain the signat.res of president and
chairman, as s.ch it was not ratified by the corporation)
4ss.e; <O( the doctrine of piercing the corporate veil may be applied)
Meld;
/he %o.rt finds no reason to pierce the corporate veil of Respondent 9otorich) $etitioner
.tterly failed to establish that said corporation was formed, or that it is operated, for the
p.rpose of shielding any alleged fra.d.lent or illegal activities of its officers or stoc8holders,
or that the said veil was .sed to conceal fra.d, illegality or ine7.ity at the epense of third
persons li8e petitioner) Veil can only be disregarded when it is .tili?ed as a shield to commit
fra.d, illegality or ine7.ity, defeat p.blic convenience, conf.se legitimate iss.es or serve as a
mere alter ego or b.siness cond.it of a person or an instr.mentality, agency or ad:.nct of
another corporation)
4n /ula&, the sale of real property was contracted by the $resident of a close corporation with
the 8nowledge and ac7.iescence of its board of directors) 4n the present case, 9otorich is not
a close corporation as previo.sly disc.ssed and the agreement was entered into by the
corporate treas.rer witho.t the 8nowledge of the Board of Girectors) /he %o.rt is not
.naware that there are eceptional cases where an action by a director who singly is the
controlling stoc8holder, may be considered a binding corporate act and a board action is
nothing more than a mere formality) /he present case is not of them) Eranting arg.endo that
the corporate veil of 9otorich may be pierced, said parcel of land wo.ld then be treated as
con:.gal property of the spo.ses Er.enberg, beca.se the same was ac7.ired d.ring the
marriage) /here being no indication that said spo.ses who appear to have been married
before the effectivity of the Family %ode have agreed to different property regime, their
property relations wo.ld be governed by a con:.gal partnership of gains) (either spo.se can
alienate in favor of another his interest in the partnership or in any property belonging to it#
neither spo.se can as8 for a partition of the properties before the partnership has been
legally dissolved)
0. A$$#".)t"'%3+
Revised Bagtas Reviewer by Ve and Ocfe 2A
4)5 -a.orit' E/uit' (ners)ip and "nterlockin+ Directors)ip>
Ownership of a ma:ority of capital stoc8 and the fact that ma:ority of directors of a
corporation are the directors of another corporation creates no employer5employee
relationship with the latterYs employees) a/BP v. L*C, 103 S%RA 0*1 '1,,2-
GB$ v (&R%
Facts;
$hilippine Smelter %orporation obtained a loan in 1,01 from GB$ to finance its iron smelting
and steel man.fact.ring b.siness) /o sec.re the loan, $S% mortgaged to GB$ real properties
and chattels with its $resident 9arcelo as co5obligor Beca.se of this GB$ became the ma:ority
stoc8holder of $S% with stoc8holdings of $ 119 o.t of $ 32 9 s.bscribed and paid .p capital
stoc8 and too8 over $S%Ns management) $S% failed to pay and GB$ foreclosed on the
mortgaged realties and chattels) *2 alleged .npaid employees filed a petition for invol.ntary
insolvency in the R/% against $S% and GB$) Said employees were employed by Olecram
9ining %orp), =ose $anganiban 4ce $lant and %old Storage, 4nc) all impleaded as co5
respondent) /hey filed another complaint with the GO&" against $S% for non5payment of
salaries, 11
th
month pay, incentive leave and separation pay) GB$ was impleaded beca.se the
employees considered GB$ as the parent company of $S%) Since the GB$ was the biggest
creditor of $S%, it held ma:ority of stoc8 and involved in management thro.gh Board of
Girectors, GB$ was considered to be by the employees as their employer) GB$ was invo8ed
absence of "5" relationship in its Answer) /he labor arbiter held GB$ as liable for .npaid
wages d.e to $S%Ns foreclos.re which it ca.sed as foreclosing creditor) (&R% s.stained this,
hence, this petition)
Meld;
GB$ as foreclosing creditor co.ld not be held liable for .npaid wages, etc) of the employees of
$S%) /he fact that GB$ is a ma:ority stoc8holder of $S% and $S% are from GB$ does not
s.fficiently indicate the eistence of an "5" relationship between the terminated employees of
$S% and GB$) Said wor8ers have no ca.se of action against GB$ and the labor arbiter does
not have :.risdiction to ta8e cogni?ance of said case)
Mence, ownership of a ma:ority of capital stoc8 and the fact the ma:ority of directors of a
corporation are the directors of another corporation creates no "5" relationship with the
latterNs employees)
9ere ownership by a single stoc8holder or by another corporation of all or nearly
all of the capital stoc8 of a corporation is not of itself s.fficient gro.nd for disregarding
the separate corporate personality) Sunio v. L*C , 126 S%RA 1,2 '1,0*-# !sionics
Philippines, 'nc. v. L*C, 2,2 S%RA 13* '1,,0-# ,rancisco v. Me?ia, 132 S%RA 610
'2221-# Matutina 'ntegrated 5ood Products, 'nc. v. C!, 231 S%RA *,2 '1,,3-# Manila
Hotel Corp. v. L*C, 1*1 S%RA 1 '2222-)
9ere s.bstantial identity of incorporators of two corporations does not necessarily
imply fra.d, nor warrant the piercing of the veil of corporate fiction) 4n the absence of
clear and convincing evidence to show that the corporate personalities were .sed to
perpet.ate fra.d, or circ.mvent the law, the corporations are to be rightly treated as
distinct and separate from each other) Laguio v. L*C, 232 S%RA 61+ '1,,3-)
Maving interloc8ing directors, corporate officers and shareholders is not eno.gh
:.stification to pierce the veil of corporate fiction in the absence of fra.d or other
p.blic policy considerations) 1elarde v. Lope., *1, S%RA *22 '222*-# Sesbreno v.
Court of !ppeals, 222 S%RA *33 '1,,1-)
475 0ein+ Corporate fficer1 Being an officer or stoc8holder of a corporation does not
by itself ma8e oneYs property also of the corporation, and vice<versa, for they are
separate entities, and that shareholders are in no legal sense the owners of corporate
16
property which is owned by the corporation as a distinct legal person) -ood "arth
"mporium, 'nc. v. C!, 1,* S%RA +** '1,,1-)
/he mere fact that one is president of the corporation does not render the property
he owns or possesses the property of the corporation, since that president, as an
individ.al, and the corporation are separate entities) Cru. v. /alisa&, 1+2 S%RA *06
'1,06-# Booc v. Bantuas, 1+* S%RA 26, '2221-)
4t is hornboo8 law that corporate personality is a shield against personal liability of
its officersQa corporate officer and his spo.se cannot be made personally liable .nder
a tr.st receipt where he entered into and signed the contract clearly in his official
capacity) 'ntestate "state of !le(ander %. %& v. Court of !ppeals, 1+3 S%RA 31 '2221-#
Consolidated Ban+ and %rust Corp. v. Court of !ppeals, 1+3 S%RA 361 '2221-)
4.5 Dealin+s 0et(een Corporation and Stock)olders1
/he fact that the ma:ority stoc8holder had .sed his own money to pay part of the
loan of the corporation cannot be .sed as the basis to pierce) @4t is .nderstandable
that a shareholder wo.ld want to help his corporation and in the process, ass.re that
his sta8es in the said corporation are sec.red)A LBP v. Court of !ppeals, 13* S%RA 16+
'2221-)
Use of a controlling stoc8holderNs initials in the corporate name is not s.fficient
reason to pierce the corporate veil, since by that practice alone does it mean that the
said corporation is merely a d.mmy of the individ.al stoc8holder) A corporation may
ass.me any name provided it is lawf.l, and there is nothing illegal in a corporation
ac7.iring the name or as in this case, the initials of one of its shareholders) LBP v.
Court of !ppeals, 13* S%RA 16+ '2221-)
/he mere fact that a stoc8holder sells his shares of stoc8 in the corporation d.ring
the pendency of a collection case against the corporation, does not ma8e s.ch
stoc8holder personally liable for the corporate debt, since the disposing stoc8holder
has no personal obligation to the creditor, and it is the inherent right of the
stoc8holder to dispose of his shares of stoc8 anytime he so desires) *emo, )r. v. '!C,
162 S%RA *2+ '1,0,-# PB v. *itratto -roup, 'nc., 132 S%RA 213 '2221-)
=.st beca.se two foreign companies came from the same co.ntry and closely
wor8ed together on certain pro:ects wo.ld the concl.sion arise that one was the
cond.it of the other, th.s piercing the veil of corporate fiction) Marubeni Corp. v.
Lirag, 132 S%RA 322 '2221-)
T!& .(&)t"'% 7y DBP )3 t!& /'t!&( .'/$)%y ', t!& t!(&& /"%"%9
.'($'()t"'%3 t' /)%)9& )%- '$&()t& t!& )33&t3 ).B;"(&- "% t!& ,'(&.#'3;(&
3)#& #&3t t!&y -&t&("'()t& ,('/ %'%-;3& )%- #'3& t!&"( 1)#;&, -'&3 %'t
"%-".)t& ,();- '( *('%9-'"%9 )%- *"## %'t .'%3t"t;t& )$$#".)t"'% ', t!&
$"&(."%9 -'.t("%&. D0P *2 Court of Appeals, 0<0 SCRA 00? 42005.
T!& ,).t3 t!)t t*' .'($'()t"'%3 /)y 7& 3"3t&( .'/$)%"&3, )%- t!)t t!&y
/)y 7& 3!)("%9 $&(3'%%&# )%- (&3';(.&3, *"t!';t /'(&, "3 "%3;,,"."&%t t'
$('1& t!)t t!&"( 3&$)()t& .'($'()t& $&(3'%)#"t"&3 )(& 7&"%9 ;3&- t' -&,&)t
$;7#". .'%1&%"&%.&, C;3t",y *('%9, $('t&.t ,();-, '( -&,&%- .("/&. Padilla *2
Court of Appeals, 0?0 SCRA 20A 42005. K%&V; 4n past decisions, s.ch sit.ation
wo.ld generally warrant alter5ego piercing)L
4-5 n Pri*ile+es En.o'ed1 /he ta eemption cla.se in the charter of a corporation
cannot be etended to nor en:oyed by even its controlling stoc8holders) Manila -as
Corp. v. Collector of 'nternal *evenue, 32 $hil) 0,+ '1,13-)
4&5 bli+ations and Debts1 %orporate debt or credit is not the debt or credit of the
stoc8holder nor is the stoc8holderYs debt or credit that of the corporation) %raders
*o&al Ban+ v. Court of !ppeals, 166 S%RA 60, '1,0,-)
A corporation has no legal standing to file a s.it for recovery of certain parcels of
land owned by its members in their individ.al capacity, even when the corporation is
organi?ed for the benefit of the members) Sulo ng Ba&an v. !raneta, 'nc), 62 S%RA 1*6
Revised Bagtas Reviewer by Ve and Ocfe 2A
'1,63-)
Stoc8holders have no personality to intervene in a collection case covering the
loans of the corporation since the interest of shareholders in corporate property is
p.rely inchoate) Saw v. C!, 1,+ S%RA 6*2 '1,,1-# and vice<versa ,rancisco Motors
Corp. v. Court of !ppeals, 12, S%RA 62 '1,,,-)
/he ma:ority stoc8holder cannot be held personality liable for the attorneyNs fees
charged by a lawyer for representing the corporation) Laperal /ev. Corp. v. Court of
!ppeals, 221 S%RA 231 '1,,1-)
"ven when the foreclos.re on the corporate assets was wrongf.l done,
stoc8holders have no standing to recover for themselves moral damages# otherwise, it
wo.ld amo.nt to the appropriation by, and the distrib.tion to, s.ch stoc8holders of
part of the corporationNs assets before the dissol.tion of the corporation and the
li7.idation of its debts and liabilities) !P% v. Court of !ppeals, 122 S%RA +6, '1,,0-)
/he obligations of a stoc8holder in one corporation cannot be offset from the
obligation of the stoc8holder in a second corporation, since the corporation has a
separate :.ridical personality) C0H 'ndustrial and /ev. Corp v. Court of !ppeals, 262
S%RA 111 '1,,6-)
B. PIERCING THE VEIL O6 CORPORATE 6ICTION+
. S';(.& ', I%.)%t)t"'%+ 6nited States v. Milwau+ee *efrigerator %ransit Co., 1*2 Fed)
2*6 '1,2+-)
/he notion of corporate entity will be pierced or disregarded and the individ.als
composing it will be treated as identical if the corporate entity is being .sed as a cloa8 or
cover for fra.d or illegality# as a :.stification for a wrong# or as an alter ego, an ad:.nct, or a
b.siness cond.it for the sole benefit of the stoc8holders) -ochan v. @oung, 1+* S%RA 226
'2221-# /BP v. Court of !ppeals, 1+6 S%RA 323, 1+0 S%RA +21, 131 S%RA 126 '2221-)
2. N)t;(& ', D'.t("%& 'a%raders *o&al Ban+ v. Court of !ppeals, 23, S%RA 1+ K1,,6L-
/RAG"RS ROHA& BA(O v %OUR/ OF A$$"A&S
Facts;
Filriters E.aranty Ass.rance %orporation 'Filriters- is the registered owner of %entral Ban8
%ertificate of 4ndebtedness '%B%4- with a face val.e of +22,222) S.ch was then transferred to
$hilippine Underwriters Finance %orporation '$hilfinance- .nder a Getached Assignment)
$hilfinance entered into a rep.rchase agreement with /raders Royal Ban8 over the %B%4
whereby /RB b.ys the %B%4 and $hilfinance will rep.rchase it on April 26, 1,01 for
+1,,131)11 Upon the defa.lt of $hilfinance /RB so.ght to register the %B%4 in its name) %B
ref.sed to register and transfer the %B%4 d.e to the adverse claim of Filriters) 'Filriters
inter:ected the defense that Alfredo Banaria Senior V$ of Filriters witho.t any board
resol.tion, 8nowledge or consent of the board of directors eec.ted the detached assignment
in favor of $hilfinance) S.bse7.ently, Alberto Fabella, Senior V$ %omptroller and $ilar =acobe
Senior V$ /reas.ry, of Filriters and of $hilfinance eec.ted similar forms transferring the %B%4
to /RB) As s.ch the transfers were n.ll and void)-
/RB then went to the R/% of 9anila and filed for mandam.s to compel %B to register)
$etitioner arg.ed that the %B%4 was a negotiable instr.ment and that it was a holder in d.e
co.rse) 4t also contended that $hilfinance owned ,2R of FilriterNs e7.ity and the two
corporations have identical officers, this demanding the application of the doctrine of piecing
the veil of corporate fiction as to give validity to the transfer of the %B%4)
4ss.e; <O( the doctrine of piercing the veil of corporate fiction applicable in this case)
1,
Meld;
/he %B%4 is not a negotiable instr.ment beca.se it lac8s the words of negotiability) 4t is
payable only to Filriters and the transfer by a non5owner i)e) $hilfinance, to /RB sho.ld have
p.t the latter on g.ard as to the title of $hilfinance to dispose of the %B%4) Also the
assignment of Filriters to$hilfinance was fictitio.s as the same is witho.t consideration and
was contrary to the r.les of %B %irc.lar 62 which provides that any assignment shall not be
valid .nless made by the registered owner in person or by a d.ly a.thori?ed representative in
writing) $hilfinance merely borrowed the %B%4 from Filriters a sister corporation to g.arantee
financing corporations)
/he doctrine of piecing the corporate veil is an e7.itable remedy which may only be awarded
in cases when the corporate fiction is .sed to defeat p.blic convenience, :.stify wrong,
protect fra.d or defend crime or where a corporation is a mere alter ego or b.siness cond.it
of a person) 4t re7.ires the co.rt to see thro.gh the protective shro.d which eempts its
stoc8holders from liabilities that ordinarily, they co.ld be s.b:ect to or disting.ishes one
corporation from a seemingly separate one, were it not for the eisting corporate fiction) /he
co.rt m.st be s.re that the corporate fiction was mis.sed)) 4t is the protection of innocent 1
rd
parties dealing with corporate entity that the law see8s to protect by this doctrine) 4n this
case, other than the allegation that Filriters is ,2R owned by $hilfinance and the identity of
one shall be maintained as to the other, there is nothing else which co.ld lead the co.rt .nder
the circ.mstances to disregard their separate corporate personalities) /here is no showing
that /RB was defra.ded at all when it ac7.ired the s.b:ect certificate of indebtedness from
$hilfinance)
/he fact that $hilfinance owns a ma:ority share in Filriters is not by itself a gro.nd to disregard
their independent corporate entities) 4n &iddel I %o) 4nc) v) %4R mere ownership by a single
stoc8holder or by another corporation of all or nearly all of the capital stoc8 of a corporation is
not itself a s.fficient reason to disregard the fiction of separate corporate personalities)
/RB being a commercial ban8 which deals with corporate entities with circ.mstances showing
that the agents are acting in ecess of corporate a.thority may not hold the corporation
liable) /his is only fair as everyone m.st in the eercise of his rights and in the performance of
his d.ties, act with :.stice, give everyone his d.e and observe honesty and good faith)
<hen the legal fiction of separate corporate personality is ab.sed, s.ch as when the
same is .sed for fra.d.lent or wrongf.l ends, the co.rts have not hesitated to pierce the
corporate veil) ,rancisco v. Me?ia, 132 S%RA 610 '2221-)
$iercing the veil of corporation fiction is warranted only in cases when the separate legal
entity is .sed to defeat p.blic convenience, :.stify wrong, protect fra.d, or defend crime,
s.ch that in the case of two corporations, the law will regard the corporation as merged into
one) 1elarde v. Lope., *1, S%RA *22 '222*-)
/he legal fiction of separate corporate eistence is not at all times invincible and the
same may be pierced when employed as a means to perpetrate a fra.d, conf.se legitimate
iss.es, or .sed as a vehicle to promote .nfair ob:ectives or to shield an otherwise blatant
violation of the prohibition against for.m5shopping) <hile it is settled that the piercing of
the corporate veil has to be done with ca.tion, this corporate fiction may be disregarded
when necessary in the interest of :.stice) *ovels "nterprises, 'nc. v. 7campo, 1,1 S%RA 163
'2222-)
/he nat.re of the piercing doctrine is to disregard the separate :.ridical personality of a corporation
and to hold the actors or the stoc8holders of the corporation liable for a wrong committed or a
liability avoided) 4n o.r lessons in corporation law, we disting.ish the ca.se of the piercing beca.se it
wo.ld eplain of piercing is properly done) /he S.preme %o.rt does not go into an eplanation or
direct attrib.tion as to ca.se of the piercing which at times ca.se conf.sion, so to clarify matters we
classify the piercing case into three namely; '1- fra.d '2- alter ego and '1- remedy)
4n the cases of fra.d, the piercing is done beca.se there is a wrong committed) /herefore, a person
behind the wrong m.st be held liable which in a corporation are the directors, since the corporation
acts thro.gh them) A piercing of the corporate veil in fra.d cases is for the p.rpose of ma8ing the
directors directly liable) 4n fra.d cases, the S% loo8s into the circ.mstances of the case searching for
Revised Bagtas Reviewer by Ve and Ocfe 2A
elements of malice or evil motive) An absence of s.ch an evil motive, the co.rts will not allow
piercing) An eample wo.ld be the case of /RB v) %A where the %o.rt did not allow piercing beca.se
there was no in:.ry ca.sed) Also in the Umali case, the co.rt did not allow piercing beca.se the main
intent was to ann.l a real estate mortgage .nder an allegation of fra.d and not to hold the Girectors
liable) 4n both cases, piecing was not the proper remedy, even if fra.d was act.ally alleged beca.se
the fra.d committed was not attrib.ted directly to the acts of the agents of the corporation)
4n alter ego cases, the allegation does not go into fra.d or malicio.s intent b.t a disrespect for the
corporate fiction) Mere, the corporation is being .sed as a cond.it or front for the activities of a
person, whether nat.ral or :.ridical, in order to avoid liability or gain advantage over another witho.t
really employing fra.d) Mere, if piercing is allowed then the corporate eistence of the cond.it
corporation is disregarded and the person or corporation behind the corporation shall be considered
as one and the liability of one is the liability of the other) /he main intent here is not to ma8e the
board of directors of the cond.it corporation liable b.t to ma8e the corporation behind the eistence
of the cond.it liable) 4t is the ob:ective of the %orporation %ode to foster p.blic convenience in
sanctioning the creation of a corporation not as a means or private convenience where it is to be
.sed by other corporations or individ.als as a means to circ.mvent liability or ca.se a disr.ption of
normal b.siness practice in dealing with corporations)
"7.ity s.bdivision is the catch5all s.bdivision) 4f not fra.d or alter ego, the co.rt may grant piercing
as an e7.itable remedy, b.t s.ch is .s.ally resorted to as a reason in consonance with fra.d or alter
ego cases) As s.ch it is of p.rely :.dicial discretion)
/he three cases may appear together in one application;
FRAUG > to prevent wrong
$4"R%4(E GO%/R4(" A&/"R "EO > disrespect for the corporate fiction and to defeat p.blic
convenience
"CU4/H > to do :.stice
/he application of the doctrine to a partic.lar case does not deny the corporation of legal
personality for any and all p.rposes, b.t only for the partic.lar transaction or instance for
which s.ch doctrine was applied)
4)5 E/uitable Remed'1 /he doctrine of piercing the corporate veil is an e7.itable doctrine
developed to address sit.ations where the separate corporate personality of a
corporation is ab.sed or .sed for wrongf.l p.rposes) aPB v. *itratto -roup, 'nc., 132
S%RA 213 '2221-)
475 Remed' of !ast Resort1 $iercing the corporate veil is remedy of last resort and is not
available when other remedies are still available) a6mali v. Court of !ppeals, 10, S%RA
+2, '1,,2-)
U9A&4 v) %OUR/ OF A$$"A&S
Facts;
/he %astillo family is the owner of a parcel of land which was given as sec.rity for a loan from the
GB$) For fail.re to pay the amorti?ation, foreclos.re of the property was initiated) /his was made
8nown to Santiago Rivera, the nephew of plaintiff 9a.ricia 9eer vda) Ge %astillo and president of
Slobec Realty Gev) %orp) Rivera proposed to them the conversion into a s.bdivision lot of the fo.r
parcels of land ad:acent to the mortgaged property to raise the money) /he %astillos agreed so a
9OA was eec.ted between Slobec represented by Rivera and the %astillos) Rivera obliged himself
to pay the %astillos $62/ after the eec.tion of the contract and $*22/ after the property had been
converted into a s.bdivision) Rivera armed with the agreement approached %ervantes, president of
Bormaheco and bo.ght a %aterpillar /ractor with $+2/ down payment and the balance of $102/
payable in installments) Slobec thro.gh Rivera eec.ted in favor of Bormaheco a chattel mortgage
over the said e7.ipment as sec.rity for the .npaid balance) As f.rther sec.rity, Slobec obtained
*1
thro.gh the 4ns.rance %orporation of the $hilippines a S.rety Bond in favor of %o.nter5E.aranty with
R"9 eec.ted by Rivera as president of Slobec and the %astillos as mortgagors and 4%$ as
mortgagee) /he %aterpillar /ractorwas delivered to Slobec)
9eanwhile for violation of the terms and the conditions of the %o.nter5E.aranty Agreement, the
properties of the %astillos was foreclosed by 4%$) As the highest bidder, a %ertificate of Sale was
iss.ed in its favor and /%/s over the parcels of land were iss.ed by the Register of Geeds in favor of
4%$) /he mortgagors had one year from the registration of the sale to redeem the property b.t they
failed to do so) 4%$ consolidated its ownership over the parcels of land) &ater on 4%$ sold to $hilippine
9achinery $arts 9fg) %o) the parcels of land and by virt.e of said sale, $9 transferred .nto itself the
title of the lots) $9 parts thro.gh its $resident, %ervantes sent a letter to the %astillos to vacate the
property) /he %astillos ref.sed to do so) S.bse7.ently, Umali the administrati of the properties of
%astillos filed an action for ann.lment of titles) /hey co.ntered that all the transaction starting from
the Agreement of %o.nter5E.aranty with R"9 are void for being entered into in fra.d) /hey see8 to
pierce the veil of corporate entity of Bormaheco, 4%$ and $9 $arts alleging that these corporations
employed fra.d in ca.sing the foreclos.re and s.bse7.ent sale of their land) /he lower co.rt r.led in
favor of Umali) /his was reversed by the %A)
Meld;
/he S% is not convinced that the contract entered into by the parties are fra.d.lent)
Under the doctrine of piecing the veil of corporate entity, when valid gro.nd eists , the following
effects wo.ld be prod.ced; '1- legal fiction that a corporation is an entity with a :.ridical personality
separate and distinct from its members or stoc8holders may be disregarded '2- in s.ch cases, the
corporation will be considered as a mere association of person '1- the members or stoc8holders of
the corporation will be considered as the corporation, ma8ing them liable directly) 4t is only
applicable when corporate fiction is; '1- .sed to defeat p.blic convenience, :.stify wrong, protect
fra.d, or defend crime '2- made as a shield to conf.se legitimate iss.ed '1- where a corporation is
the mere alter ego or b.siness cond.it of a person '*- where the corporation is so organi?ed and
controlled and its affairs are so cond.cted as to ma8e it merely an instr.mentality), agency , cond.it
or ad:.nct of another corporation)
/he S% is of the opinion that piecing the veil is not the proper remedy in order that the foreclos.re
proceedings may be declared a n.llity .nder the circ.mstances in the case at bar) $etitioners are
merely see8ing the declaration of the n.llity of the foreclos.re sale, which relief may be obtained
witho.t having to disregard the aforesaid corporate fiction attaching to the respondent corporations)
$etitioners also fail to establish by clear and convincing evidence that private respondents were
p.rposely formed and operated, with the sole intention of defra.ding the latter) /he facts showed
that the s.rety of 4%$ is good only for 12 months therefore the s.rety had already epired) /he
fail.re of 4%$ to give notice renders 4%$ to have no right to foreclos.re) 4n this case, piercing need not
be resorted to)
C; <hy is Umali see8ing to pierce the corporate entityD
A; Umali is see8ing to have the veil pierced beca.se it wo.ld have shown that the contracts entered
into were fictitio.s and sim.lated, there being a fra.d.lent intent on the part of Bormaheco, 4%$ I
$9 parts to ac7.ire the property of Umali thro.gh the foreclos.re of the mortgage by 4%$) Mowever,
the co.rt belied s.ch allegation beca.se the mere fact that the b.siness of two or more corporations
are interrelated is not a :.stification for disregarding their separate personalities, absent a s.fficient
showing that the corporate entity was p.rposely .sed as a shield to defra.d creditors and third
persons of their rights)
C; <hy are we st.dying UmaliD
A; /he allegations made by Umali were based on fra.d and yet the main ob:ective of the s.it was to
ann.l the foreclos.re of the mortgage) /he %o.rt fo.nd no reason to pierce since the main ob:ective
was not in consonance with the remedy of piercing in a fra.d case wo.ld do, which was to hold the
Board of Girectors liable) $iercing is not allowed .nless the remedy so.ght is to ma8e the officer or
another corporation pec.niary liable for corporate debts)
C; <hat if it was based on alter egoD
A; /he probative factor show that no alter ego eisted since there was no disrespect of the corporate
fiction, the corporations each having its own way of cond.cting b.siness) "ven if it may be that they
compliment one another in their b.siness cond.ct, it does not form eno.gh basis for their
Revised Bagtas Reviewer by Ve and Ocfe 2A
circ.mvention of any liability)
4.5 Purpose of Piercin+1 $iercing is not allowed .nless the remedy so.ght is to ma8e the
officer or another corporation pec.niarily liable for corporate debts 'D-) 6mali v. C!, 10,
S%RA +2, '1,,2-A a'ndophil %e(tile Mill 5or+ers 6nion<P%-57 v. Calica, 22+ S%RA 3,6
'1,,2-)
4(GO$M4& /"B/4&" 94&& <ORO"RS U(4O( v %A&4%A
Facts;
4ndophil Union is a legitimate labor organi?ation d.ly registered with the GO&" and the ecl.sive
bargaining .nit of all ran8 and file employees of 4ndophil /etile 9ills) On April 1,06, the Union and
4ndophil ecec.ted a %BA effective April 1, 1,06 to 9arch 11, 1,,2) On (ovember 1,06, 4ndophil
Acrylic was formed and registered with the S"%) 4n 1,,0, Acrylic became international and hired
wor8ers according to its criteria and standards) Sometime in =.ly 1,0,, the wor8ers of Acrylic
.nioni?e and a d.ly certified %BA was eec.ted) 4n 1,,2, the Union claimed that the plant facilities
b.ilt and set .p by Acyrlic sho.ld be considered as an etension or epansion of 4ndophil p.rs.ant to
Sec) 1'c- of Art)1 of the %BA to wit; /his agreement shall apply to all companies, facilities, and
installations and to any etension and epansion thereat) /he .nion so.gh that Acrylic be considered
part of the bargaining .nit)
/heir contention is that the articles of incorporation of the two corporation establish that the two
entities are engaged in the same 8ind of b.siness, which is the man.fact.re and sale of yarns of
vario.s co.nts and 8inds and of other materials of 8indred character or nat.re) F.rthermore, they
emphasi?e that the two corporations have practically the same incorporators, directors and officers)
Also the two corporation have their facilities in the same compo.nd) /hat many of 4ndophilNs own
machineries s.ch as dyeing machines, reeler, broiler, were transferred to and are now being .sed by
the Acrylic plant) /hat services of a n.mber of .nits, departments or sections of private respondents
are provided by Acrylic and that the employees of 4ndophil are the same persons manning and
servicing the .nits of Acrylic) Both parties s.bmitted the iss.e to &A %alica) %alica r.led for 4ndophil
and stated that Acrylic is not etension of 4ndophil an hence their %BA does not etend to the
employees of Acrylic)
4ss.e; <O( Acrylic is a separate and distinct entity from 4ndophil for p.rposes of .nion
representation) <O( the operations in Acrylic are an etension or epansion of 4ndophil)
Meld;
Acrylic is not an alter ego or an ad:.nct or a b.siness cond.it of 4ndophil beca.se it has a separate
legitimate b.siness p.rpose) 4ndophil engages in the man.fact.re of yarns while Acrylic is to
man.fact.re, b.y, sell at wholesale basis, barter, import, eport and otherwise deal in vario.s 8inds
of yarns) /wo corporations cannot be treated as single bargaining .nit :.st beca.se they have
related b.sinesses)
/he Union see8s to pierce the veil of Acrylic alleging that the corporation is a device to evade the
application of the %BA) Mowever the %A held that said doctrine is only .sed on the eistence of valid
gro.nds) 4n the case at bar, the fact that the b.siness of 4ndophil and Acrylic are related that
sometimes the employees of 4ndophil are the same persons manning and providing for a.iliary
services to the .nits of Acrylic, and that the physical plants, offices, and facilities are sit.ated in the
same compo.nd) 4t is the S%Ns considered opinion that these facts are not s.fficient to :.stify the
piercing of the corporation veil of Acrylic) F.rthermore, the legal entity is disregarded only if so.ght
to hold the officers and stoc8holders liable) 4n the instant case, the Union does not see8 relief from
4ndophil)
&A %A9$A(A %OFF"" FA%/ORH v OA4SAMA( (E 9A(EEAEA<A
Facts;
/an /ong since 1,12 has been engaged in the b.ying and selling gawgaw .nder the trade
name &a %ampana Eawgaw $ac8ing) 4n 1,+2, /an /ong and members of his family organi?ed
the family corporation) &a %ampana %offee Factory with its principal office located in Eawgaw
$ac8ing) $rior to said information, /an /ong entered into a %BA with the labor .nion of &a
%ampana Eawgaw) &ater on, his employees formed Oaisahan ng mga 9anggagawa ng &a
%ampana with an a.thori?ation from the GO&" to become an affiliate of the larger .nion)
*1
Oaisahan with 33 members presented a demand for higher wages and more privileges to &a
%ampana Starch and %offee Factory) /he demand was not granted and the GO&" certified the
iss.e to the %4R) &a %ampana filed a motion to dismiss alleging that the action was directed
against two different entities with distinct personalities) /his was denied, hence this petition)
Meld;
&a %ompana Eawgaw and &a %ampana Factory are operating .nder one single management or as
one b.siness tho.gh with two trade names) /he coffee factory is a corporation and by legal fiction,
an entity separate and apart from the persons composing it namely, /an /ong and his family)
Mowever, the concept of separate corporate personality cannot be etended to a point beyond
reason and policy when invo8ed in s.pport of an end s.bversive of this policy and will be disregarded
by the co.rts)
A s.bsidiary company which is created merely as an agent for the latter may sometimes
be regarded as identical with the parent corporation especially if the stoc8holders or officers
of the two corporations are s.bstantially the same or their systems of operation .nified) /he
facts showed that they had one management, one payroll prepared by the same person,
laborers were interchangeable, there is only one entity as shown by the signboard ad in
tr.c8s, pac8ages and delivery forms and the same place of b.siness)
/he attempt to ma8e the two factories appear as two separate b.sinesses when in reality
they are b.t one, is b.t a device to defeat the ends of the law and sho.ld not be permitted to
prevail)
<MH $4"R%"D So that &a %ampana cannot evade the :.risdiction of %4R since &a %ampana Eawgaw
has only 1* employees and only + are members of Oaisahan)
%O(/RAS/4(E /M" /<O %AS"S
C; <hy did the co.rt not also pierce 4ndophil Acrylic and declare that it is a mere alter ego of 4ndophil
when in fact the same circ.mstances in &a %ampana eistD
A; 4t may seem that the facts and circ.mstances are nearly the same between the two cases b.t the
remedies are different) &a %ampana so.ght the protection of separate :.ridical personality so as it
may not fall .nder the :.risdiction of the %4R, there being a clear intent to be ec.sed from the
coverage of &abor &aws which conferred the %4RNs :.risdiction over the iss.e at hand) Altho.gh there
was no intent to defra.d, the creation of &a %ampana %offee Factory was meant to ec.se itself from
%4R :.risdiction) Mowever, in 4ndophil the facts of the case show that there was no clear showing that
4ndophil meant to .se Acrylic as a means of circ.mventing &abor &aws) Alto.gh the %BA between
4ndophil and its .nion provides that any epansion of 4ndophilNs operations wo.ld also be covered by
the %BA, Acrylic is an altogether different b.siness) <hat showed that there was no intent by
4ndophil or Acrylic to circ.mvent labor laws is when Acrylic entered into a %BA with its own
employees) /here was clear independence of action between the relation of 4ndophil and Acrylic as to
their respective employees, each constit.ting its own bargaining .nit)
C; %o.ld 4ndophil be considered as have s.perseded &a %ampanaD
A; %&V pointed o.t that were no mention of &a %ampana in the r.ling in 4ndophil whether in s.pport
or in contravention of this doctrine) 4t can be seen that act.ally there are no points where 4ndophil
had s.bstantially changed the r.ling in &a %ampana) &a %ampana, in fact is being cited in cases
decided by the S% after 4ndophil, in the same way that 4ndophil contin.es to be cited) /he criteria
that when it is established that between two corporations which have one set of managers or board
of directors# that there is a common stoc8 ownership of both corporations# similarity of 8eeping
corporate boo8s and in cond.cting their b.sinesses are mere probative factors that are to be
considered when the corporate mas8 may be lifted and the corporate veil pierced) 4t does not mean
that if these factors eist, piercing is a.tomatically re7.ired) /here is for one no hard and fast r.le
that can be laid down) So that in &a %ampana, the factors weighed heavily for piercing and in
4ndophil, against piercing)

Revised Bagtas Reviewer by Ve and Ocfe 2A
$iercing is not available when personal obligations of an individ.al are to be enforced
against the corporation 'D- *obledo v. L*C, 210 S%RA +2 '1,,*-)
@/he rationale behind piercing a corporationNs identity in a given case is to remove
the barrier between the corporation from the persons comprising it to thwart the
fra.d.lent and illegal schemes of those who .se the corporate personality as a shield for
.nderta8ing certain proscribed activities) Mowever, in the case at bar, instead of holding
certain individ.als or person responsible for an alleged corporate act, the sit.ation has
been reversed) 4t is the petitioner as a corporation which is being ordered to answer for
the personal liability of certain individ.al directors, officers and incorporators concerned)
Mence, it appears to .s that the doctrine has been t.rned .pside down beca.se of its
erroneo.s invocation)A a,rancisco Motors Corp. v Court of !ppeals, 12, S%RA 62 '1,,,-)
$iercing doctrine is meant to prevent fra.d, and cannot be employed when the net
res.lt wo.ld be to perpetrate fra.d or a wrong) -regorio !raneta, 'nc. v. %uason de
Paterno and 1idal, ,1 $hil) 603 '1,+2-)
/he theory of corporate entity was not meant to promote .nfair ob:ectives or
otherwise, nor to shield them) 1illanueva v. !dre, 162 S%RA 063 '1,0,-)
4-5 0asis -ust 0e Clear E*idence1 /o disregard the separate :.ridical personality of a
corporation, it is elementary that the wrongdoing cannot be pres.med and m.st be
clearly and convincingly established) /he organi?ation of the corporation at the time
when the relationship between the landowner and the developer were still cordial cannot
be .sed as a basis to hold the corporation liable later on for the obligations of the
landowner to the developer .nder the mere allegation that the corporation is being .sed
to evade the performance of obligation by one of its ma:or stoc8holders) Lu(uria
Homes, 'nc. v. Court of !ppeals, 122 S%RA 11+ '1,,,-)
/he mere assertion by a Filipino litigant against the eistence of a @tandemA
between two =apanese corporations cannot be the basis for piercing, which can only be
applied by showing wrongdoing by clear and convincing evidence) Marubeni Corp. v.
Lirag, 132 S%RA 322 '2221-)
/o disregard the separate :.ridical personality of a corporation, the wrongdoing m.st
be clearly and convincingly established) 4t cannot be pres.med) 4n this case, the %o.rt
finds that the Remington failed to discharge its b.rden of proving bad faith on the part
of 9arind.7.e 9ining and its transferees in the mortgage and foreclos.re of the s.b:ect
properties to :.stify the piercing of the corporate veil) /BP v. Court of !ppeals, 131 S%RA
126 '2221-)
/he party see8ing for the piercing of the corporate veil has the b.rden of presenting
clear and convincing evidence to :.stify the setting aside of the separate corporate
personality r.le) PB v. !ndrada "lectric # "ngineering Co., 101 S%RA 2** '2222-)
Application of the doctrine of piercing the corporate veil sho.ld be done with ca.tion)
A co.rt sho.ld be mindf.l of the milie. where it is to be applied) 4t m.st be certain that
the corporate fiction was mis.sed to s.ch an etent that in:.stice, fra.d, or crime was
committed against another, in disregard of its rights) /he wrongdoing m.st be clearly
and convincingly established# it cannot be pres.med) Otherwise, an in:.stice that was
never .nintended may res.lt from an erroneo.s application) PB v. !ndrada "lectric #
"ngineering Co., 101 S%RA 2** '2222-)
4&5 Not Applicable to #)eori3in+1 $iercing of the veil of corporate fiction is not allowed
when it is resorted .nder a theory of co5ownership to :.stify contin.ed .se and
possession by stoc8holders of corporate properties) aBo&er<*o(as v. Court of !ppeals,
211 S%RA *62 '1,,2-)
/he piercing doctrine is an e7.itable remedy available only to persons o.tside the
corporation) 4t cannot be availed of stoc8holders within the corporation forming part of the
corporation) 4n comparison, %&V .ses the Story of the <all) /his wall is the main doctrine,
designed both to protect the stoc8holders by virt.e of the attrib.te of limited liability and to
hide from prying eyes the inner wor8ings of the corporation) Stoc8holders are inside these
*+
walls) $iercing the veil of corporate fiction is li8e a battering ram that creates a hole thro.gh
this wall to allow third persons to loo8 into the corporation to see if there is a wrong
committed inside those walls) A stoc8holder being inside the fort are afforded other remedies,
they have intra5corporate remedies to avail of)
/he piercing doctrine cannot be availed of to dislodge from S"%Ns :.risdiction a
petition for s.spension of payments filed .nder $)G) ,225A, on the gro.nd that the
petitioning individ.als sho.ld be treated as the real petitioners to the ecl.sion of the
petitioning corporate debtor) @/he doctrine of piercing the veil of corporate fiction
heavily relied .pon by the petitioner is entirely misplaced, as said doctrine only applies
when s.ch corporate fiction is .sed to defeat p.blic convenience, :.stify wrong, protect
fra.d or defend crime)A 6nion Ban+ v. Court of !ppeals, 2,2 S%RA 1,0 '1,,0-)
4,5 Applicable to 4#)ird5Parties61
/hat respondents are not stoc8holders of the sister corporations does not ma8e
them non5parties to this case, since it is alleged that the sister corporations are mere
alter egos of the directors5petitioners, and that the sister corporations ac7.ired the
properties so.ght to be reconveyed to FESR% in violation of directors5petitionersN
fid.ciary d.ty to FESR%) /he notion of corporate entity will be pierced and the
individ.als composing it will be treated as identical if the corporate entity is being .sed
as a cloa8 or cover for fra.d or illegality# as a :.stification for a wrong# or as an alter ego,
an ad:.nct, or a b.siness cond.it for the sole benefit of the stoc8holders) a-ochan v.
@oung, 1+* S%RA 226 '2221-)
495 $iercing is a power belonging to the co.rt and cannot be ass.med improvidently by a
sheriff 'D-) Cru. v. /alisa&, 1+2 S%RA *02 '1,06-)
0. C'%3&B;&%.&3 )%- Ty$&3 ', P"&(."%9 C)3&3; '6mali v. C!, 10, S%RA +2, K1,,2L-
4)5 Application of the doctrine to a partic.lar case does not deny the corporation of legal
personality for any and all p.rposes, b.t only for the partic.lar transaction or instance,
or the partic.lar obligation for which the doctrine was applied) 0oppel 2Phil.3 'nc. v.
@atco, 66 $hil) *,3 '1,*3-# %antoco v. 0aisahan ng Mga Manggagawa sa La Campana,
123 $hil) 1,0 '1,+,-# ,rancisco v. Me?ia, 132 S%RA 610 '2221-)
475 C#)33",".)t"'% ', P"&(."%9 C)3&3+
Rundo(n on Piercin+ Application1 /his %o.rt pierced the corporate veil to ward
off a :.dgment credit, to avoid incl.sion of corporate assets as part of the estate of the
decedent, to escape liability arising for a debt, or to perpet.ate fra.d andJor conf.se
legitimate iss.es either to promote or to shield .nfair ob:ectives to cover .p an
otherwise blatant violation of the prohibition against for.m shopping) Only is these and
similar instances may the veil be pierced and disregarded) PB v. !ndrada "lectric #
"ngineering Co., 101 S%RA 2** '2222-)
4"5 6();- P"&(."%9+ <hen corporate entity .sed to commit fra.d or do a wrong
4""5 A#t&(-&9' P"&(."%9+ <hen corporate entity merely a farce since the corporation
is merely the alter ego, b.siness cond.it, or instr.mentality of
a person or another entity
4"""5 EB;"ty C)3&3+ <hen piercing the corporate fiction is necessary to achieve :.stice
or e7.ity)
/he three cases may appear together in one application) See *.,. Suga& # Co., v.
*e&es, 12 S%RA 622 '1,3*-)
4. 6();- C)3&3+
<hen the legal fiction of the separate corporate personality is ab.sed, s.ch as when the
same is .sed for fra.d.lent or wrongf.l ends, the co.rts have not hesitated to pierce the
corporate veil) a,rancisco v. Me?ia, 132 S%RA 610 '2221-)
4n accordance with the foregoing r.le, this %o.rt has disregarded the separate
Revised Bagtas Reviewer by Ve and Ocfe 2A
personality of the corporation were the corporate entity was .sed to escape liability to third
parties) 4n this case, however, we do not find any fra.d on the part of the 9arind.7.e
9ining and its transferees to warrant the piercing of the corporate veil) /BP v. Court of
!ppeals, 1+6 S%RA 323, 1+0 S%RA +21, 131 S%RA 126 '2221-)
)5 Acts b' Controllin+ S)are)older1 <here a stoc8holder, who has absol.te control
over the b.siness and affairs of the corporation, entered into a contract with another
corporation thro.gh fra.d and false representations, s.ch stoc8holder shall be liable
soidarily with co5defendant corporation even when the contract s.ed .pon was entered
into on behalf of the corporation) aamarco v. !ssociated ,inance Co., 1, S%RA ,32
'1,36-)
%&V; As a general r.le, an agent acting within the scope of his a.thority cannot be held liable
for acts done in behalf of the principal) Mowever, when a wrong done by a corporation is
thro.gh a person in its behalf, piercing ma8es both of them liable) 4n fact, an agents who
commits a crime or fra.d can be held liable despite the agency relation)
<here the corporation is .sed as a means to appropriate a property by fra.d which
property was later resold to the controlling stoc8holders, then piercing sho.ld be
allowed) Heirs of *amon /urano, Sr. v. 6&, 1** S%RA 210 '2222-)
475 A*oidance of #a&es1 /he plea to pierce the veil of corporate fiction on the allegation
that the corporations tr.e p.rpose is to avoid payment by the incorporating spo.ses of
the estate taes on the properties transferred to the corporations; @<ith regard to
their claim that "llice and 9argo were meant to be .sed as mere tools for the
avoidance of estate taes, s.ffice it to say that the legal right of a tapayer to red.ce
the amo.nt of what otherwise co.ld be his taes or altogether avoid them, by means
which the law permits, cannot be do.bted)A -ala v. "llice !gro<'ndustrial Corp., *10
S%RA *11 '2221-)
4.5 A*oidance of Contractual or Ci*il !iabilities1 One cannot evade civil liability by
incorporating properties or the b.siness) aPalacio v. ,el& %ransportation Co., + S%RA
1211 '1,32-)
C; <hy sho.ld a case be classified as a fra.d case, an alter ego case, etc)D
A; 4n fra.d cases, it is necessary that the petitioners see8 to enforce the claim against the
stoc8holders or corporate officers) Since, in fra.d cases only one act of fra.d is necessary to
hold them liable whereas in an alter ego case, a series of transaction has to proven before
they may be held liable)
<hen .sed to avoid a contract.al commitment against non5competition) a1illa *e&
%ransit, 'nc. v. ,errer, 2+ S%RA 0*+ '1,30-)
4&5 A*oidin+ !e+al Restrictions1
/he corporate veil cannot be .sed to shield an otherwise blatant violation of the
prohibition against for.m5shopping) Shareholders, whether s.ing as the ma:ority in
direct actions or as the minority in a derivative s.it, cannot be allowed to trifle with
co.rt processes, partic.larly where the corporation itself has not been remiss in
vigoro.sly prosec.ting or defending corporate ca.ses and in .sing and applying
remedies available to it) ,irst Philippine 'nternational Ban+ v. Court of !ppeals, 2+2
S%RA 2+, '1,,3-)
4-5 Parent5Subsidiar' Relations7 Affiliates+ 'Commissioner of 'nternal *evenue
v. orton and Harrison, 11 S%RA 62*, K1,+*L# %omas Lao Construction v. L*C, 260
S%RA 613 K1,,6L-)
C; <hy is there an inordinate showing of the alter ego elementsD
A; 4n cases of parent5s.bsidiary relations, it is necessary that the fact.al circ.mstances be
considered in order to disting.ish between a case of fra.d or alter ego) /here may be an
inordinate showing of alter ego elements b.t that does not necessarily ma8e it an alter ego
case) /herefore, alter ego in fra.d cases m.st be disting.ished from p.re alter ego) 4n fra.d
cases, the alter ego concept pertains to employing the corporation even for a single
transaction to do evil while in p.re alter ego cases, the co.rts go into systematic findings of
*6
.tter disregard and disrespect of the separate :.ridical personality of the corporation)
4&5 %uidin+ Principles in $raud Cases+
4W)' is t)ere inordinate s)o(in+ of alter5e+o elements, 3
/here m.st have been fra.d or an evil motive in the affected
transaction, and the mere proof of control of the corporation by
itself wo.ld not a.thori?e piercing# and
/he main action sho.ld see8 for the enforcement of pec.niary
claims pertaining to the corporation against corporate officers or
stoc8holders)
5. A#t&(-E9' C)3&3+
4)5 $actual 0asis1 /he 7.estion of whether a corporation is a mere alter ego is a p.rely
one of fact, and the b.rden is on the party who alleges it) PB v. !ndrada "lectric #
"ngineering Co., 101 S%RA 2** '2222-# M* Holdings,Ltd. 1. Ba?ar, 102 S%RA 316
'2222-# Heirs of *amon /urano, Sr. v. 6&, 1** S%RA 210 '2222-# Concept Builders, 'nc.
v. L*C, 2+6 S%RA 1*, '1,,3-)
475 Usin+ Corporation as Conduit or Alter E+o1
<here the capital stoc8 is owned by one person and it f.nctions only for the benefit
of s.ch individ.al owner, the corporation and the individ.al sho.ld be deemed the
same) a!rnold v. 5illets and Patterson, Ltd., ** $hil) 31* '1,21-)
<hen corporation is merely an ad:.nct, b.siness cond.it or alter ego of another
corporation, the fiction of separate and distinct corporation entities sho.ld be
disregarded) %an Boon Bee # Co. v. )arencio, 131 S%RA 22+ '1,00-)
<here a debtor registers his residence to a family corporation in echange of
shares of stoc8 and contin.es to live therein, then the separate :.ridical personality
may be disregarded) PBCom v. C!, 1,+ S%RA +36 '1,,1-)
(either has it been alleged or proven that 9erryland is so organi?ed and controlled
and its affairs are so cond.cted as to ma8e it merely an instr.mentality, agency
cond.it or ad:.nct of %ardale) "ven ass.ming that the b.sinesses of %ardale and
9erryland are interrelated, this alone is not :.stification for disregarding their separate
personalities, absent any showing that 9erryland was p.rposely .sed as a shield to
defra.d creditors and third persons of their rights) ,rancisco v. Me?ia, 132 S%RA 610
'2221-)
Use of nominees to man the corporation for the benefit of the controlling
stoc8holder) Marvel Building v. /avid, , $hil) 163 '1,+1-
)
4.5 -i&in+5up perations7 Disrespect to t)e Corporate Entit'1
"mployment of same wor8ers# single place of b.siness, etc), may indicate alter ego
sit.ation) aLa Campana Coffee ,actor& v. 0aisahan ng Manggagawa, ,1 $hil) 132
'1,+1-# aShoemart v. L*C, 22+ S%RA 111 '1,,1-)
<here two b.siness enterprises are owned, cond.cted, and controlled by the same
parties, both law and e7.ity will, when necessary to protect the rights of third persons,
disregard the legal fiction that two corporations are distinct entities and treat them as
identical) Sibagat %imber Corp. v. -arcia, 213 S%RA 62 '1,,2-)
<here corporate fiction was .sed to perpetrate social in:.stice or as a vehicle to
evade obligations or conf.se the legitimate iss.es 'as in this case where the actions of
management of the two corporations created conf.sion as to the proper employer of
claimants-, it wo.ld be discarded and the two corporations wo.ld be merged as one)
!.cor Manufacturing, 'nc. v. L*C, 121 S%RA 23 '1,,,-)
9iing of personal acco.nts with corporate ban8 deposit acco.nts) *amire.
Revised Bagtas Reviewer by Ve and Ocfe 2A
%elephone Corp. v. Ban+ of !merica, 2, S%RA 1,1 '1,3,-)
4-5 A*oidance of ta&es1 a@utivo Sons Hardware v. Court of %a( !ppeals 1 S%RA 132
'1,31-# Liddell # Co. v. Collector of 'nternal *evenue,

2 S%RA 312 '1,31-)
HU/4VO I SO(S 4(%) v %/A
Facts;
H.tivo is a domestic corporation engaged in the importation and sale of hardware s.pplies and
e7.ipment) 4t bo.ght a n.mber of cars and tr.c8s from Eeneral 9otors Overseas %orporation) E9
paid sales ta on original sales on the basis of its selling price to H.tivo) H.tivo paid no f.rther ta on
its sales to the p.blic) So.thern 9otors was then organi?ed to engage in the b.siness of selling cars,
tr.c8s, and spare parts with capital stoc8 of 12,222 shares, 2,+22 of which were s.bscribed in e7.al
proportion by the children of H.tivoNs incorporators) Under this set5.p, H.tivo wo.ld p.rchase the
cars and t.c8s from E9 then sell the same to S9 which in t.rn sold them to the general p.blic) /hen
E9 withdrew its operations from the $hilippines) H.tivo too8 over the importation of tr.c8s and cars)
4t li8ewise contin.ed to have the previo.s arrangement of selling ecl.sively to S9 which in t.rn paid
no s.ch sales ta on its sales to the general p.blic) /he %4R made an assessment .pon H.tivo and
demanded a s.m representing deficiency sales ta pl.s s.rcharges claiming that the taable sales
were the retail sales sho.ld be between S9 to the general p.blic and not the sale at wholesale made
by H.tivo to S9 since the two were one and the same corporation, S9 being a mere s.bsidiary of
H.tivo) %/A affirmed s.ch a r.ling and f.rther stated that there was no legitimate p.rpose in the
organi?ation of S9 > apparently organi?ed to evade the payment of taes > and that it was owned
and controlled by H.tivo and is a mere branch, ad:.nct, cond.it, instr.mentality or alter ego of
H.tivo)
4ss.e; <O( S9 is a mere alter ego of H.tivo meant to defra.d government of lawf.l ta reven.esD
Meld;
S9 was not organi?ed for the p.rpose of defra.ding the government of lawf.l ta reven.es beca.se;
'1- /he intention to minimi?e taes as in ta evasion when .sed in the contet of fra.d, m.st be
proven to eist by clear and convincing evidence amo.nting to more than the mere preponderance
of evidence) /he evidence of the collector falls short of s.ch standard)
'2- S9 was organi?ed at a time when there was not yet ta to evade, when E9 was still the importer
and was the one paying the sales ta)
'1- /he transactions between H.tivo and S9 were and have always been in the open, embodied in
private and p.blic doc.ments, constantly s.b:ect to inspection by ta a.thorities)
'*- A tapayer has the legal right to decrease the amo.nt of what otherwise wo.ld be his taes
altogether avoid them by means which the law permits)
'+- Mowever, S9 was act.ally owned and controlled by H.tivo to ma8e it a mere s.bsidiary or branch
of the latter) S9 was organi?ed by the leading stoc8holders of H.tivo) H.tivo was at all times in
control if the ma:ority stoc8 of S9) /he principal officers of both corporations are identical) /h.s, the
b.siness, financial and management policies of both corporations co.ld be directed towards common
ends) /he f.nds of S9 are directly remitted to H.tivo and s.b:ect to withdrawal only of H.tivo, S9Ns
reso.rces being .nder H.tivoNs control) /he acco.nting system maintained by H.tivo shows that it
maintained a high degree of control over S9 acco.nts) All transactions between H.tivo and S9 are
recorded and effected by mere debit or credit entries against the reciprocal acco.nt maintained in
their respective boo8s of acco.nts and indicate the dependency of S9 as a branch of H.tivo)
'3- /h.s, S9 being a mere instr.mentality of H.tivo, the %/A correctly disregarded the technical
defense of separate corporate entity in order to arrive at the tr.e liability of H.tivo)
C; %an ta avoidance not be considered as a crime th.s perpet.ated in fra.d rather than an alter
ego caseD A; /he %o.rt had in this case r.led as to the legitimacy of a
corporation to act as to see8 means to decrease its ta liability) /he difference between H.tivo and
/an Boon Oong is that in the latter, the co.rt fo.nd evidence that /an Boon Oong acted beyond the
scope of his a.thority) 4n the former, evidence was seen to be ins.fficient as to establish a willf.l
desire to evade taes)
*,
4&5 #)inl'5capitali3ed corporations1 aMcConnel v. C!, 1 S%RA 622 '1,31-)
/he fact that a corporation has no ade7.ate capital eno.gh basis for piercing) S.ch
prono.ncement limits the advantage of creating a corporation) For eample, in cases where
leveraging is .nderta8en which is considered as a legitimate b.siness practice)
4,5 Parent5subsidiar'7 Affiliated Companies1 0oppel 2Phil.3, 'nc. v. @atco, 66 $hil) ,6
'1,*3-# PH'1'/"C v. Court of !ppeals, 101 S%RA 33, '1,,2-)
/he person who invo8es the doctrine m.st always be the in:.red party)
Absence of proof that control over a corporation is being .sed by a mother
company to commit fra.d or wrong, there wo.ld be no basis to disregard their
separate :.ridical personalities) *amoso v. Court of !ppeals, 1*6 S%RA *31 '2222-#
-uatson 'nt$l %ravel and %ours, 'nc. v. L*C, 212 S%RA 01+ '1,,2-)
4f .sed to perform legitimate f.nctions, a s.bsidiaryNs separate eistence shall be
respected, and the liability of the parent corporation as well as the s.bsidiary will be
confined to those arising in their respective b.sinesses) "ven when the parent
corporation agreed to the terms to s.pport a standby credit agreement in favor of the
s.bsidiary, does not mean that its personality has merged with that of the s.bsidiary)
M*. Holdings, Ltd. 1. Ba?ar, 102 S%RA 316 '2222-)
495 S;//)(y ', P('7)t"1& 6).t'(3+ aConcept Builders, 'nc. v. L*C, 2+6 S%RA 1*,
'1,,3-# PB v. *itratto -roup, 'nc., 132 S%RA 213 '2221-# 1elarde v. Lope., *1, S%RA
*22 '222*-)
%O(%"$/ BU4&G"RS 4nc) v (&R%
Facts;
%oncept B.ilders is engaged in the constr.ction b.siness) $rivate respondents are employed by the
company as laborers, carpenters and riggers) 4n (ovember of 1,01, private respondents were served
individ.al notices of termination by the company) 4t stated that their contract had already epired)
/he (&R% discovered that the pro:ect for which they were hired was not yet even finished) 4n addition
to this, %oncept had to hire s.bcontractors whose wor8s are the same as private respondents) A writ
of eec.tion was iss.ed which was partially satisfied thro.gh the garnishment of money from 9<SS
which is a debtor of %oncept and the balance was to be collected from %oncept directly) B.t the
sheriff reported that when the writ was to be served the g.ard on d.ty ref.sed it on the gro.nd that
%oncept no longer owned the premises and was now occ.pied by Mydro $ipes, which had the same
Board of Girectors as %oncept)
Meld;
/he veil may be pierced when it its :.st the alter ego of a person of another corporation)
/he conditions .nder which the :.ridical entity may be disregarded vary according to the pec.liar
facts and circ.mstances of each case) (o hard and fast r.le can be laid down, b.t there are some
probative factors of identity that will :.stify the application of the doctrine)
S.mmary probative factors; '1- stoc8 membership by one ore common ownership of both '2- identity
of directors and officers 'management- '1- manner of 8eeping corporate boo8s and records
'management- '*- methods of cond.cting b.siness 'management-)
<hile petitioners claimed that it ceased operations in 1,03, it filed an 4nformation Sheet with the S"%
in 1,06 stating that its office address is their old address) Both information sheets were filed by
Virgilio %asino, the same corporate secretary) /hey had the same $resident, Board of Girectors and
s.bstantially the same s.bscribers)
4!5 %uidin+ Principles in Alter5E+o Cases1
Goctrine applies even in the absence of evil intent, beca.se of
the direct violation of a central corporate law principle of
separating ownership from management#
Goctrine in s.ch cased is based on estoppel; if stoc8holders do
not respect the separate entity, others cannot also be epected
Revised Bagtas Reviewer by Ve and Ocfe 2A
to be bo.nd by the separate :.ridical entity#
$iercing in alter ego cases may prevail even when no monetary
claims are so.ght to be enforced against the stoc8holders or
officers of the corporation)
4"5 Distinction 0et(een $raud Piercin+ and Alter5e+o Piercin+1 aLipat v. Pacific
Ban+ing Corp., *22 S%RA 11, '2221-)
<. EB;"ty C)3&3+
4)5 <hen .sed to conf.se legitimate iss.es) %elephone "ngineering and Service Co., 'nc.
1. 5CC, 12* S%RA 1+* '1,01-)
475 <hen .sed to raise technicalities) "milio Cano "nt. v. C'*, 11 S%RA 2,1 '1,3+-)
?. D;& P('.&33 C#);3&
4)5 (eed to bring a new case against the officer) aPadilla v. Court of !ppeals, 162 S%RA
220 '2221-# McConnel v. Court of !ppeals, 1 S%RA 621 '1,31-)
A s.it against individ.al shareholders in a corporation is not a s.it against the
corporation) Fail.re to implead the corporations as defendants and merely anneing a
list of s.ch corporations to the complaints is a violation of d.e process for it wo.ld in
effect be disregarding their distinct and separate personality witho.t a hearing) PC--
v. Sandiganba&an, 13+ S%RA +10 '2221-)
Altho.gh both lower co.rts fo.nd s.fficient basis for the concl.sion that $OA and
$hoeni Omega were one and the same, and the former is merely a cond.it of the
other the S.preme %o.rt held void the application of a writ of eec.tion on a :.dgment
held only against $OA, since the R/% obtained no :.risdiction over the person of
$hoeni Omega which was never s.mmoned as formal party to the case) /he general
principle is that no person shall be affected by any proceedings to which he is a
stranger, and strangers to a case are not bo.nd by the :.dgment rendered by the
co.rt) Padilla v. Court of !ppeals, 162 S%RA 220 '2221-)
475 <hen corporate officers are s.ed in their official capacity when the corporation was
not made a party, the corporation is not denied d.e process) "milio Cano "nterprises
v. C'*, 11 S%RA 2,1 '1,3+-)
4.5 $rovided that evidential basis has been add.ced d.ring trial to apply the piercing
doctrine) a)acinto v. Court of !ppeals, 1,0 S%RA 211 '1,,1-# !rcilla v. Court of
!ppeals, 21+ S%RA 122 '1,,2-)
+1
V. &CLASSI6ICATIONS O6 CORPORATIONS
. I% R&#)t"'% t' t!& St)t&+
)5 Public Corporation 'Sec) 1, Act (o) 1*+,-)
- one formed or organi?ed for the government or a portion of the state
- its p.rpose is for general good and welfare
75 8uasi5public Corporation2 Marilao 5ater Consumers !ssociates v. '!C, 221 S%RA *16
'1,,1-#
- marriage of both a p.blic and a private corp)
- it is granted the same powers as a private corp) b.t they have no
incorporators, SMNs or members
- eample; A water district, altho.gh established as a corporation, it was
established for the greater good and with no stoc8holders) /hey are also
placed .nder the :.risdiction of the &<UA not the S"%
.5 Pri*ate Corporation 'Sec) 1, Act 1*+,-)
5 one formed for some private p.rpose, benefit or end)
EovernmentNs ma:ority shares does not ma8e an entity a p.blic corporation) ational
Coal Co., v. Collector of 'nternal *evenue, *3 $hil) +01 '1,2*-)
A corporation is created by operation of law .nder the %orporation %ode while a
government corporation is normally created by special law referred to often as a charter)
Bliss /ev. Corp. "mplo&ees 6nion v. Calle?a, 216 S%RA 261 '1,,*-)
/he test to determine whether a corporation is government owned or controlled, or
private in nat.re is simple) 4s it created by its own charter for the eercise of a p.blic
f.nction, or by incorporation .nder the general corporation lawD /hose with special
charters are government corporations s.b:ect to its provisions, and its employees are
.nder the :.risdiction of the %ivil Service %ommission, and are comp.lsory members of
the ES4S) Camparedondo v. L*C, 112 S%RA *6 '1,,,-
<hile p.blic benefit and p.blic welfare may be attrib.table to the operation of the
Bases %onversion and Gevelopment A.thority 'B%GA-, yet it is certain that the f.nctions it
performs are basically proprietary in nat.reQthe promotion of economic and social
development of %entral &.?on, partic.larly, and the co.ntryNs goal for enhancement)
/herefore, the r.le that prescription does not r.n against the State will not apply to B%GA,
it being said that when title of the Rep.blic has been divested, its grantees, altho.gh
artificial bodies of its own creation, are in the same category as ordinary persons)
Shipside 'nc. v. Court of !ppeals, 1+2 S%RA 11* '2221-)
Altho.gh Boy Sco.ts of the $hilippines does not receive any monetary or financial
s.bsidy from the Eovernment, and its f.nds and assets are not considered government in
nat.re and not s.b:ect to a.dit by the %OA, the fact that it received a special charter from
the government, that its governing board are appointed by the Eovernment, and that its
p.rpose are of p.blic character, for they pertain to the ed.cational, civic and social
development of the yo.th which constit.te a very s.bstantial and important part of the
nation, it is not a p.blic corporation in the same sense that m.nicipal corporation or local
governments are p.blic corporation since its does not govern a portion of the state, b.t it
Revised Bagtas Reviewer by Ve and Ocfe 2A
also does not have proprietary f.nctions in the same sense that the f.nctions or activities
of government5owned or controlled corporations, is may still be considered as s.ch, or
.nder the 1,06 Administrative %ode as an instr.mentality of the Eovernment, and it
employees are s.b:ect to the %ivil Service &aw) Bo& Scouts of the Philippines v. L*C, 1,3
S%RA 163 '1,,1-)
B.t being a EO%% ma8es it liable for laws and provisions applicable to the Eovernment
or its entities and s.b:ect to the control of the Eovernment) Cervantes v. !uditor -eneral,
,1 $hil) 1+, '1,+2-)
Beyond cavil, a EO%% has a personality of its own, distinct and separate from that of
the government, and the intervention in a transaction of the Office of the $resident
thro.gh the "ec.tive Secretary does not change the independent eistence of a
government entity as it deals with another government entity) P6P v. Court of !ppeals,
130 S%RA 3,1 '2221-)
/he doctrine that employees of EO%%s, whether created by special law or formed as
s.bsidiaries .nder the general corporation law are governed by the %ivil Service &aw and
not by the &abor %ode, has been s.pplanted by the 1,06 %onstit.tion) /he present
doctrine in determining whether a EO%% is s.b:ect to the %ivil Service &aw is the manner
of its creation, s.ch that government corporations created by special charter are s.b:ect
the %ivil Service &aw, while those incorporated .nder the general corporation law are
governed by the &abor %ode) P7C<"nerg& /evelopment Corp. v. L*C, 221 S%RA *06
'1,,1-# /avao Cit& 5ater /istrict v. Civil Service Commission, 221 S%RA +,1 '1,,1-)
Section 11 of %orporation %ode 'Liabilit& of /irectors and 7fficers- is applicable to
corporations which have been organi?ed by special charters since Sec) * of %orporation
%ode renders the provisions s.pplementarily applicable to all corporations, incl.ding those
with special or individ.al charters, s.ch as cooperatives organi?ed .nder $)G) 23,, so long
as those provisions are not inconsistent with s.ch charters) Benguet "lectric Cooperative,
'nc. v. L*C, 22, S%RA ++ '1,,2-)
<ater districts can validly eists as corporate entities .nder $G 1,0, and provided they
are government5owned or controlled, and their board of directors and other personnel are
government employees s.b:ect to civil service laws and anti5graft laws) ,eliciano v.
Commission on !udit, *1, S%RA 131 '222*-)
2. A3 t' P#).& ', I%.'($'()t"'%+
4)5 Domestic Corporation
- incorporated in the $hilippines
475 $orei+n Corporation 'Sec) 121-
5 Sec) 121 Gefinition and rights of foreign corporations > For the p.rposes of this
%ode, a foreign corporation is one formed, organi?ed or eisting .nder any laws other
than those of the $hilippines and whose laws allow Filipino citi?ens and corporations
to do b.siness in its own co.ntry or state) 4t shall have the right to do b.siness in its
own co.ntry or state) 4t shall have the right to transact b.siness in the $hilippines
after it shall have obtained a license to transact b.siness in this co.ntry in
accordance with this %ode and a certificate of a.thority from the appropriate
government a.thority)
- incorporated in another co.ntry and that co.ntry grants the same rights to Filipinos in
terms of doing b.siness there# it shall have the right to transact b.siness in the $hilippines
after it shall have obtained a license to transact b.siness in this co.ntry in accordance
with this code I a certificate of a.thority from the appropriate government agency ' S"%
license after obtaining BO4 certificate -
0. A3 t' P;($'3& ', I%.'($'()t"'%+
+1
4)5 -unicipal Corporation > &EUNs
- can s.e be s.ed witho.t their consent ' as provided for by the &E%-
- in certain instances considered as an ad:.nct to the national government b.t has been
recogni?ed to have a personality separate and distinct from the national government)
475 Reli+ious Corporation 'Secs) 12, and 113-
Section 12,) %lasses of religio.s corporations. 5 Religio.s corporations
may be incorporated by one or more persons) S.ch corporations may
be classified into corporations sole and religio.s societies)
Religio.s corporations shall be governed by this %hapter and by the
general provisions on non5stoc8 corporations insofar as they may be
applicable)
Section 113) Religio.s societies. 5 Any religio.s society or religio.s
order, or any diocese, synod, or district organi?ation of any religio.s
denomination, sect or ch.rch, .nless forbidden by the constit.tion,
r.les, reg.lations, or discipline of the religio.s denomination, sect or
ch.rch of which it is a part, or by competent a.thority, may, .pon
written consent andJor by an affirmative vote at a meeting called for
the p.rpose of at least two5thirds '2J1- of its membership, incorporate
for the administration of its temporalities or for the management of its
affairs, properties and estate by filing with the Sec.rities and "change
%ommission, articles of incorporation verified by the affidavit of the
presiding elder, secretary, or cler8 or other member of s.ch religio.s
society or religio.s order, or diocese, synod, or district organi?ation of
the religio.s denomination, sect or ch.rch, setting forth the following;
1) /hat the religio.s society or religio.s order, or diocese, synod, or
district organi?ation is a religio.s organi?ation of a religio.s
denomination, sect or ch.rch#
2) /hat at least two5thirds '2J1- of its membership have given their
written consent or have voted to incorporate, at a d.ly convened
meeting of the body#
1) /hat the incorporation of the religio.s society or religio.s order, or
diocese, synod, or district organi?ation desiring to incorporate is not
forbidden by competent a.thority or by the constit.tion, r.les,
reg.lations or discipline of the religio.s denomination, sect, or ch.rch
of which it forms a part#
*) /hat the religio.s society or religio.s order, or diocese, synod, or
district organi?ation desires to incorporate for the administration of its
affairs, properties and estate#
+) /he place where the principal office of the corporation is to be
established and located, which place m.st be within the $hilippines#
and
/he names, nationalities, and residences of the tr.stees elected by
the religio.s society or religio.s order, or the diocese, synod, or district
organi?ation to serve for the first year or s.ch other period as may be
prescribed by the laws of the religio.s society or religio.s order, or of
the diocese, synod, or district organi?ation, the board of tr.stees to be
not less than five '+- nor more than fifteen '1+-) '132a-
Since in matters p.rely ecclesiastical the decisions of the proper ch.rch trib.nals are
concl.sive .pon the civil trib.nals, then a ch.rch member who is epelled from the
membership by the ch.rch a.thorities, or a priest or minister who is by them deprived of his
sacred office, is witho.t remedy in the civil co.rts) Long v. Basa, 133 S%RA 111 '2221-)
Revised Bagtas Reviewer by Ve and Ocfe 2A
4.5 Educational Corporations 'Secs) 123, 126 and 120# Sec) 2+, B)$) Blg) 212-
Section 123) 4ncorporation. 5 "d.cational corporations shall be
governed by special laws and by the general provisions of this %ode)
'n-
Section 126) $re5re7.isites to incorporation. 5 "cept .pon favorable
recommendation of the 9inistry of "d.cation and %.lt.re, the
Sec.rities and "change %ommission shall not accept or approve the
articles of incorporation and by5laws of any ed.cational instit.tion)
'130a-
Section 120) Board of tr.stees. 5 /r.stees of ed.cational instit.tions
organi?ed as non5stoc8 corporations shall not be less than five '+- nor
more than fifteen '1+-; $rovided, however, /hat the n.mber of tr.stees
shall be in m.ltiples of five '+-)
Unless otherwise provided in the articles of incorporation on the by5
laws, the board of tr.stees of incorporated schools, colleges, or other
instit.tions of learning shall, as soon as organi?ed, so classify
themselves that the term of office of one5fifth '1J+- of their n.mber
shall epire every year) /r.stees thereafter elected to fill vacancies,
occ.rring before the epiration of a partic.lar term, shall hold office
only for the .nepired period) /r.stees elected thereafter to fill
vacancies ca.sed by epiration of term shall hold office for five '+-
years) A ma:ority of the tr.stees shall constit.te a 7.or.m for the
transaction of b.siness) /he powers and a.thority of tr.stees shall be
defined in the by5laws)
For instit.tions organi?ed as stoc8 corporations, the n.mber and
term of directors shall be governed by the provisions on stoc8
corporations) '13,a-
4-5 C)aritable, Scientific or 9ocational Corporations
4&5 0usiness Corporation
4. A3 t' N;/7&( ', M&/7&(3+
4)5 A++re+ate Corporation
475 Corporation Sole 'Secs) 112 to 11+# *oman Catholic !postolic !dministrator of /avao,
'nc. v. L*C and the *egister of /eeds of /avao Cit&, 122 $hil) +,3 K1,+6L-)
Section 112) %orporation sole) 5 For the p.rpose of administering and
managing, as tr.stee, the affairs, property and temporalities of any
religio.s denomination, sect or ch.rch, a corporation sole may be
formed by the chief archbishop, bishop, priest, minister, rabbi or other
presiding elder of s.ch religio.s denomination, sect or ch.rch) '1+*a-
Section 111) Articles of incorporation) 5 4n order to become a
corporation sole, the chief archbishop, bishop, priest, minister, rabbi or
presiding elder of any religio.s denomination, sect or ch.rch m.st file
with the Sec.rities and "change %ommission articles of incorporation
setting forth the following;
1) /hat he is the chief archbishop, bishop, priest, minister, rabbi or
presiding elder of his religio.s denomination, sect or ch.rch and that
he desires to become a corporation sole#
2) /hat the r.les, reg.lations and discipline of his religio.s
denomination, sect or ch.rch are not inconsistent with his becoming a
corporation sole and do not forbid it#
++
1) /hat as s.ch chief archbishop, bishop, priest, minister, rabbi or
presiding elder, he is charged with the administration of the
temporalities and the management of the affairs, estate and properties
of his religio.s denomination, sect or ch.rch within his territorial
:.risdiction, describing s.ch territorial :.risdiction#
*) /he manner in which any vacancy occ.rring in the office of chief
archbishop, bishop, priest, minister, rabbi of presiding elder is re7.ired
to be filled, according to the r.les, reg.lations or discipline of the
religio.s denomination, sect or ch.rch to which he belongs# and
+) /he place where the principal office of the corporation sole is to be
established and located, which place m.st be within the $hilippines)
/he articles of incorporation may incl.de any other provision not
contrary to law for the reg.lation of the affairs of the corporation) 'n-
Section 112) S.bmission of the articles of incorporation) 5 /he articles
of incorporation m.st be verified, before filing, by affidavit or
affirmation of the chief archbishop, bishop, priest, minister, rabbi or
presiding elder, as the case may be, and accompanied by a copy of the
commission, certificate of election or letter of appointment of s.ch
chief archbishop, bishop, priest, minister, rabbi or presiding elder, d.ly
certified to be correct by any notary p.blic)
From and after the filing with the Sec.rities and "change %ommission
of the said articles of incorporation, verified by affidavit or affirmation,
and accompanied by the doc.ments mentioned in the preceding
paragraph, s.ch chief archbishop, bishop, priest, minister, rabbi or
presiding elder shall become a corporation sole and all temporalities,
estate and properties of the religio.s denomination, sect or ch.rch
theretofore administered or managed by him as s.ch chief archbishop,
bishop, priest, minister, rabbi or presiding elder shall be held in tr.st
by him as a corporation sole, for the .se, p.rpose, behalf and sole
benefit of his religio.s denomination, sect or ch.rch, incl.ding
hospitals, schools, colleges, orphan asyl.ms, parsonages and
cemeteries thereof) 'n-
Section 111) Ac7.isition and alienation of property. 5 Any corporation
sole may p.rchase and hold real estate and personal property for its
ch.rch, charitable, benevolent or ed.cational p.rposes, and may
receive be7.ests or gifts for s.ch p.rposes) S.ch corporation may sell
or mortgage real property held by it by obtaining an order for that
p.rpose from the %o.rt of First 4nstance of the province where the
property is sit.ated .pon proof made to the satisfaction of the co.rt
that notice of the application for leave to sell or mortgage has been
given by p.blication or otherwise in s.ch manner and for s.ch time as
said co.rt may have directed, and that it is to the interest of the
corporation that leave to sell or mortgage sho.ld be granted) /he
application for leave to sell or mortgage m.st be made by petition,
d.ly verified, by the chief archbishop, bishop, priest, minister, rabbi or
presiding elder acting as corporation sole, and may be opposed by any
member of the religio.s denomination, sect or ch.rch represented by
the corporation sole; $rovided, /hat in cases where the r.les,
reg.lations and discipline of the religio.s denomination, sect or ch.rch,
religio.s society or order concerned represented by s.ch corporation
sole reg.late the method of ac7.iring, holding, selling and mortgaging
real estate and personal property, s.ch r.les, reg.lations and
discipline shall control, and the intervention of the co.rts shall not be
necessary) '1+,a-
Revised Bagtas Reviewer by Ve and Ocfe 2A
Section 11*) Filling of vacancies. 5 /he s.ccessors in office of any chief
archbishop, bishop, priest, minister, rabbi or presiding elder in a
corporation sole shall become the corporation sole on their accession
to office and shall be permitted to transact b.siness as s.ch on the
filing with the Sec.rities and "change %ommission of a copy of their
commission, certificate of election, or letters of appointment, d.ly
certified by any notary p.blic)
G.ring any vacancy in the office of chief archbishop, bishop, priest,
minister, rabbi or presiding elder of any religio.s denomination, sect or
ch.rch incorporated as a corporation sole, the person or persons
a.thori?ed and empowered by the r.les, reg.lations or discipline of the
religio.s denomination, sect or ch.rch represented by the corporation
sole to administer the temporalities and manage the affairs, estate and
properties of the corporation sole d.ring the vacancy shall eercise all
the powers and a.thority of the corporation sole d.ring s.ch vacancy)
'1+0a-
Section 11+) Gissol.tion) 5 A corporation sole may be dissolved and its
affairs settled vol.ntarily by s.bmitting to the Sec.rities and "change
%ommission a verified declaration of dissol.tion)
/he declaration of dissol.tion shall set forth;
1) /he name of the corporation#
2) /he reason for dissol.tion and winding .p#
1) /he a.thori?ation for the dissol.tion of the corporation by the
partic.lar religio.s denomination, sect or ch.rch#
*) /he names and addresses of the persons who are to s.pervise the
winding .p of the affairs of the corporation)
Upon approval of s.ch declaration of dissol.tion by the Sec.rities and
"change %ommission, the corporation shall cease to carry on its
operations ecept for the p.rpose of winding .p its affairs)
/he doctrine in *epublic v. 1illanueva, 11* S%RA 06+ '1,02- and *epublic v. 'glesia ni
Cristo, 126 S%RA 306 '1,0*-, that a corporation sole is dis7.alified to ac7.ireJhold
alienable lands of the p.blic domain, beca.se of the constit.tional prohibition 7.alifying
only individ.als to ac7.ire land and the provision .nder the $.blic &and Act which applied
only to Filipino citi?ens or nat.ral persons, has been e&pressl' o*erturned in /irector of
Land v. '!C, 1*3 S%RA +2, '1,03-)
1
5. A3 t' L&9)# St)t;3+
4)5 De :ure C'($'()t"'%
475 De $acto C'($'()t"'% 'Sec) 22-
Section 22) Ge facto corporations) 5 /he d.e incorporation of any
corporation claiming in good faith to be a corporation .nder this %ode,
and its right to eercise corporate powers, shall not be in7.ired into
collaterally in any private s.it to which s.ch corporation may be a
party) S.ch in7.iry may be made by the Solicitor Eeneral in a 7.o
warranto proceeding)
4.5 C'($'()t"'% 7y E3t'$$&# 'Sec) 21-
17verturning affirmed in *epublic v. 'glesia ni Cristo, 126 S%RA 306 '1,0*-# *epublic v. '!C, 130
S%RA 13+ '1,00-)
+6
Section 21) %orporation by estoppel) 5 All persons who ass.me to act
as a corporation 8nowing it to be witho.t a.thority to do so shall be
liable as general partners for all debts, liabilities and damages inc.rred
or arising as a res.lt thereof; $rovided, however, /hat when any s.ch
ostensible corporation is s.ed on any transaction entered by it as a
corporation or on any tort committed by it as s.ch, it shall not be
allowed to .se as a defense its lac8 of corporate personality)
On who ass.mes an obligation to an ostensible corporation as s.ch,
cannot resist performance thereof on the gro.nd that there was in fact
no corporation)
C) <hy is there piercing in a de facto corporationD
A) $iercing is allowed beca.se the intention of the law is to protect the contracts entered into by the
corporation)
<. A3 t' E2"3t&%.& ', S!)(&3 'Secs) 1 and +-;
Sec) 1 %lasses of %orporation > %orporations formed or organi?ed .nder this %ode may be
stoc8 or non5stoc8 corporations) %orporations which have capital stoc8 divided into shares
and are a.thori?ed to distrib.te to the holders of s.ch shares dividends or allotments of the
s.rpl.s profits on the basis of the shares held are stoc8 corporations) All other corporations
are non5stoc8 corporations)
Sec) + %orporations and incorporators, stoc8holders and members > %orporators are those
who compose a corporation, whether as stoc8holders or as members) 4ncorporators are those
stoc8holders or members mentioned in the articles of incorporation as originally forming and
composing the corporation and who are signatories thereof)
%orporators in a non5stoc8 corporation are called stoc8holders or shareholders) %orporators in
a non5stoc8 corporation are called members)
4)5 Stock Corporation
475 Non5Stock Corporation
Revised Bagtas Reviewer by Ve and Ocfe 2A
VI. CORPORATE CONTRACT LAW
See relevant portion of V4&&A(U"VA, Corporate Contract Law, 10 A/"("O &)=) 1 '(o) 2,
=.ne 1,,*-
4(/ROGU%/4O(; %orporate %ontract &aw contracts shaped by corporate law)
Form v) s.bstance s.bstance prevails
4n the levels of the legal relationship, corporate contract law is .sed to resolve
iss.es between the different levels > between the :.ridical entity level, the contract
relationship level and the b.siness entity level)
C; <hy is there a need to disting.ish corporate contract law from contract lawD
A; /here is a need to disting.ish between the two beca.se there are certain instances
where an application of corporate contract law principles are in direct conflict with
contract law principles) An eample wo.ld be in the sit.ation where a corporation is being
incorporated, the corporation code in certain instances recogni?e the binding effect of
contracts entered into in the pre5incorporation stage) B.t if contract law was strictly
applied s.ch a contract wo.ld be void since it lac8s one vital element which is consent of
the contracting parties) Mow does a corporation that does not eist yet give consentD /his
is where corporate contract law find its relevance) /he conflict between the :.ridical entity
level is reconciled with the contract.al relationship level) 'GO%/R4("; to validate the
contract entered into by the s.pposed corporation-
$RO9O/"RNS %O(/RA%/ %) BH "S/O$$"& G" FA%/O or G" =UR" G4SSO&U/4O(
C; 4n order to reach the level of corporation by estoppel, what is the essential ingredient of
s.ch doctrineD
A; <hen there is a representation that a corporation eists when in fact there is none and
at least one party tho.ght that there was a corporation)
C; Gisting.ish promoterNs contract principles from the corporation by estoppel doctrineD
A; 4n both the corporation does not eist) B.t in promoterNs contracts there is no
misrepresentation that the corporation does not yet eist) <hen the contracts are entered
into by persons who in behalf of the corporation, ac8nowledging that the corporation does
not yet eist and is still in the process of incorporation, yo. do not apply the doctrine of
corporation by estoppel) 4t is still what one may call as the promoterNs contract) '/he
moment there is no corporation and contracts are entered into .nder the representation
that the corporation does eist then that is the only time yo. apply the doctrine of
corporation by estoppel)-
) P(&-I%.'($'()t"'% C'%t().t3
4)5 W)o Are Promoters,
@$romoterA is a person who, acting alone or with others, ta8es initiative in fo.nding and
organi?ing the b.siness or enterprise of the iss.er and receives consideration therefor)
'Sec) 1)12, Sec.rities Reg.lation %ode KR)A) 06,,L-
%&V; /he definition of promoter is important to determine the liability for promoterNs contract)
Before yo. can ma8e a promoter liable, yo. m.st be able to determine who is the promoter) Me
m.st be the one who ta8es initiative on the fo.nding and organi?ation of the b.siness vent.re
which event.ally ends .p as the corporation being organi?ed)
C; At the promoterNs stage there is no :.ridical personality .ntil the S"% iss.es the certificate of
incorporation) Until the certificate is iss.ed, the stage of the de facto corporation has not yet
been reached) $rior to the de facto corporation stage what then is the stat.s of the contract
entered into by a promoter for and in behalf of the person or agent who had .nderta8en the
transactionD
A; Unenforceable) 4t is not binding .pon the corporation beca.se it has not given consent to the
a.thority of the person or agent who had .nderta8en the transaction)
+,
C; Mow can ratification be doneD
A; Ratification can be done in two ways; '1- epress ratification > a mere board resol.tion
ma8ing the corporation liable by accepting the contract and '2- implied ratification > by
accepting of benefits
475 Nature of Pre5incorporation A+reements 'Secs) 32 and 31# Ba&la v. Silang %raffic
Co., 'nc., 61 $hil) ++6 K1,*2L-)
Sec) 32 S.bscription contract > Any contract for the ac7.isition of .niss.ed stoc8s in an
eisting corporation or a corporation still to be formed shall be deemed as s.bscription within
the meaning of this /itle, notwithstanding the fact that the parties refer to it as a p.rchase or
some other contract)
Sec) 31 $re5incorporation s.bscription > A s.bscription f or shares of stoc8 of a corporation
still to be formed shall be irrevocable for a period of at least si months from the date of
s.bscription .nless all the other s.bscribers consent to the revocation, or .nless the
incorporation of said corporation fails to materiali?e within said period or within a longer
period as may be stip.lated in the contract of s.bscription; $rovided, that no pre5
incorporation s.bscription may be revo8ed after the s.bmission of the articles of
incorporation to the S"%)
%&V; Sec) 31 of the %orp) %ode governs a pre5incorporation s.bscription agreement) Sec) 31 says
that a pre5incorporation s.bscription agreement is irrevocable) /he only manner by which yo.
can revo8e it is if A&& of the other s.bscribing stoc8holders consent to the revocation) Sec) 31 is a
clear demonstration of the fact that a promoterNs contract can be valid and even irrevocable) 4n
the case of a pre5incorporation s.bscription agreement that contract is valid beca.se there are in
fact two parties) /he party s.bscribed and all of the other parties who have s.bscribed to the
other incorporators and all of them bind themselves together to form the corporation) /hat is why
it is irrevocable .nless the other party which is all of the other s.bscribers, agree)
4.5 #)eories on !iabilities for Promoter;s Contracts 'aCaga&an ,ishing /ev. Co., 'nc. v.
%eodoro Sandi+o, 3+ $hil) 221 K1,16L# a*i.al Light # 'ce Co., 'nc. v. Public Service Comm.,
2+ S%RA 20+ K1,30L# aCaram, )r. v. C!, 1+1 S%RA 162 K1,06L-)
%AEAHA( F4SM4(E G"V"&O$9"(/ %O) 4(%) v) /"OGORO SA(G4OO
Facts; 9an.el /abora , as owner of fo.r parcels of land in %agayan mortgaged the said properties to
sec.re his loan > 1
st
mortgage to $(B; $0222# 2
nd
mortgage to $(B; $6222# and 1
rd
mortgage to
Ba.?on; $2,22 which was registered and annotated on the titles of the property) 4n 1,12 /abora sold
said parcels to %agayan Fishing Gevelopment %o), said to be .nder process of incorporation, s.b:ect
to the mortgages and with the condition that title will not be transferred .ntil the corporation has
paid /aboraNs indebtedness) %agayan Fishing filed its Articles of 4ncorporation with the B.rea. of
%ommerce) /he Board of Girectors adopted a resol.tion a.thori?ing its $resident Vent.ra to sell the
fo.r parcels of land to Sandi8o with the condition that he wo.ld sho.lder the mortgage debts)
Sandi8o iss.ed promissory notes to that effect) <hen Sandi8o failed to comply with the obligation,
the corporation filed a recovery s.it) /he lower co.rt held that the contract is void since it was
entered into with a corporation that has no corporate eistence at the time the properties were
transferred to it)
4ss.e; <O( Sandi8o can be held liable for the mortgage debtD
Meld; /he S% affirmed the decision of the /%) /he fact of the matter is Sandi8o cannot be held liable
for the mortgage debt since there was no valid sale of the property, since at the time when %agayan
s.pposedly ac7.ired the property, it still had no :.ridical personality to ac7.ire property) /here was
no transfer of lots from /abora to %agayan since %agayan was only incorporated five months after
the sale)
1)- A corporation sho.ld have f.ll and complete organi?ation and eistence as an entity before it can
enter into any 8ind of contract or transact any b.siness) A corporation .ntil organi?ed has no being,
franchises or fac.lties nor do those engaged in bringing it into being have no power to bind it by
contract, .nless so a.thori?ed by the charter)
Revised Bagtas Reviewer by Ve and Ocfe 2A
2)- /he contract entered into was not between /abora and the corporation instead it was between
/abora, as owner and /abora, wife, pl.s others, as promoters of a corporation, since the corporation
was still non5eistent) /hese promoters co.ld not have acted as agents for a pro:ected corporation
since that which had no legal eistence co.ld have no agent) Altho.gh a corporation has no life .ntil
organi?ed, it does not mean that .nder no circ.mstances may the act of promoters of a corporation
be ratified by the corporation if and when s.bse7.ently organi?ed) B.t said doctrine of ratification is
not applicable here)
1)- %agayan co.ld not have and did not ac7.ire the fo.r parcels of land) 4t follows that it did not
possess any rel.ctant right to dispose of them by sale to Sandi8o) 4t was not even a de facto
corporation at the time of transfer so that it does not have the personality to enter into contracts)
*)- Some pec.liar circ.mstances; 'a- /abora formed a corporation by himself, wife and others b.t
s.bscribed to $*+,222 of $*0,622 'capital stoc8 s.bscribed-# 'b- the lands remained in /aboraNs
name despite the sale to the corporation and Sandi8o regarded /abora as the owner# 'c- Vent.ra
signed the contract in behalf of /abora# 'd- $J( iss.ed by Sandi8o was payable to the corporation to
avoid being attached by /aboraNs creditors)
C; <hy are we st.dying %agayanD
A; /his case espo.ses the element of contract law which is the lac8 of the element of consent#
there being one party, the corporation, lac8ing a :.ridical personality# the contract was th.s
declared void) %agayan and Ri?al provides .s the doctrine that promoterNs contract m.st be
adopted and ratified by the corporation) 4f the act of the promoterNs is ratified then that act is
binding on the corporation)
%&V; /he co.rt here dismissed the action against Sandi8o on the basis that at the time the properties
were sold to the corporation, it had no legal eistence, therefore, it co.ld not p.rchase anything)
Maving bo.ght nothing when it sold the said properties to Sandi8o, it had in fact nothing to sell >
therefore there was no valid ass.mption of loans and neither were there promissory notes s.pported
by valid consideration)
C; <hat if Sandi8o was aware at the time that the contract was entered that the corporation did not
eistD <hat if the corporation invo8es the doctrine of the corporation by estoppel so that Sandi8o
co.ld not raise the defense that at the time the fra.d was committed, the corporation has no :.ridical
personalityD A; Remember
that the doctrine of corporation by estoppel is only applicable if at least one of the parties 8new that
a corporation eisted when in fact it did not) 4n this case, the doctrine cannot apply beca.se nobody
was in the belief that it eisted at the time when fra.d was being committed) "ven /abora himself
8new from the start that at the time of the transfer, the corporation did not eist)
R4PA& &4EM/ I 4%" %O) 4(%) v) 9U(4%4$A&4/H OF 9ORO(E
Facts; Ri?al &ight and 4ce %o) 4nc) is a domestic corporation granted by the $.blic Service
%ommission, a certificate of p.blic convenience for the installation, operation and management of an
electric light, heat, and power service in 9orong, Ri?al) $S% re7.ired Ri?al light to show ca.se why it
sho.ld not be penali?ed for violation of the conditions of its %$% and for fail.re to comply with
directions to raise its service voltage, etc) Ri?al failed to comply so the $S% ordered the cancellation
and revocation of Ri?alNs %$% and forfeit.re of its franchise) /he order of revocation was set aside
when it was 8nown that the company representative failed to appear d.e to illness)
/he m.nicipality of Ri?al formally as8ed the $S% to revo8e Ri?alNs %$% and forfeit.re of its franchise)
$S% fo.nd that Ri?al failed to comply with its directive and violated the conditions of the %$%) $S%
ordered the cancellation and revocation of Ri?alNs %$% and the forfeit.re of its franchise)
&ater, 9orong "lectric, having been granted a franchise by the 9.nicipality of 9orong, filed with the
$S% an application for %$%) 4t later bro.ght .p the iss.e that 9orong "lectric had no legal personality
beca.se its certificate of incorporation was iss.ed only on October 16, 1,32, while the application
was filed on September 12,1,32) /he motion to dismiss was denied on the gro.nd that 9orong
"lectric is a de facto corporation) /h.s, the $S% granted 9orong "lectric a %$%) /h.s, this petition)
Meld; Gecision affirmed)
31
Under the law, before any %$% may be granted, three re7.isites m.st be present; '1- citi?en of the
$hilippines or the US or a corporation, co5partnership, association or :oint5stoc8 co) constit.ted and
organi?ed .nder the laws of the $hilippines, 32R at least of the stoc8 or paid .p capital of which
belongs entirely to citi?ens of the $hilippines or the US# '2- financially capable of .nderta8ing the
service# '1- prove that the operation of the p.blic service proposed will promote p.blic interest)
$etitioner contend that .ntil a corporation has come into being, by the iss.ance of a certificate of
incorporation by the S"%, it cannot enter into any contract as a corporation and that its application
was n.ll and void for being done prior to said iss.ance)
4ts contention that 9orong "lectric, at the moment of application and grant of franchise did not yet
have a legal personality is correct) /he legal eistence of 9orong "lectric began .pon iss.ance of the
certificate of incorporation before said time, the incorporators cannot be considered as de facto
corporation)
B.t the fact that 9orong "lectric at the moment of the application and grant of franchise was
granted does not render the franchise invalid beca.se 9orong later obtained its certificate of
incorporation and accepted the franchise in accordance with the terms and conditions thereof) <hile
a franchise cannot ta8e effect .ntil the grantee corporation is organi?ed, the franchise, may,
nevertheless be applied for before the company is f.lly organi?ed)
/he incorporation of 9orong and its acceptance of the franchise as shown by its action in prosec.ting
the application filed with the $S% for the approval of said franchise, not only perfected a contract
between the 9.nicipality of 9orong and 9orong "lectric)
%&V; /he theory .sed here by the S% to validate the contract is the contin.ing offer theory) A grant of
the franchise according to the S%, prior to the time that the corporation act.ally eisted is li8e a
conditional grant that will be effective .pon the corporationNs becoming a legal entity) $rior to that, it
is merely a contin.ing offer 'on the part of the government-)
%ARA9 =r) v %A
Facts; Baretto and Earcia contracted the services of plaintiff Arellano to prepare a pro:ect st.dy for
the organi?ation of Filipinas Orient Airways) For fail.re to pay s.ch services, Arellano s.ed the
corporation, Baretto and Earcia and petitioner Fermin and Rosa %aram as stoc8holders) /hey were
held solidarily liable with their co5defendants) Mence, this petition)
$eitioner %anson claims that said decision finds no s.pport beca.se they were mere investors in the
corporation later created) /hey sho.ld not be held solidarily liable with the corporation, who has a
separate :.ridical personality)
Meld; $etition granted)
/he services were ac7.ired by virt.e of the re7.est of Baretto and Earcia so that a report can be
represented to financiers) $etitioners are not really involved in the initial steps that finally led to the
incorporation of Filipinas Orient Airways which were being directed by Baretto) $etitioners were
merely among the financiers whose interest was to be invited and who were pers.aded to invest in
the airline)
/here was no showing that Filipinas was a fictitio.s corporation and did not have a separate :.ridical
personality to :.stify ma8ing the petitioner, as principal stoc8holders, responsible for its obligations)
As a bona fide corporation, Filipinas sho.ld alone be liable for its corporate acts as d.ly a.thori?ed by
its officers and directors) /h.s, petitioner co.ld not have been personally liable for the compensation
claimed by Arellano)
%&V; /he case tried to disting.ish participation of a promoter from that of a promotee, in a vent.re
that act.ally becomes a corporation late on) (ot every person, who participates in a vent.re that will
later become a corporation is a promoter)
C; Mow do yo. disting.ish a participation of a promoter from that of a promotee who acts
together to form a corporationD
A; /he promotees are merely passive investors) A plan is given to them and if they li8e it, they
invest) $romoters are the active participants) /hey fo.nd and they organi?e the corporation)
According to %aram only the promoters sho.ld be liable) /he S% held that a mere promotee
'those who merely s.bscribe to the shares of stoc8- sho.ld not be held liable for a promoterNs
Revised Bagtas Reviewer by Ve and Ocfe 2A
contract ':.st as an ordinary stoc8holder after a corporation has already been incorporated
cannot be held liable for more that beyond his investment-)
%&V; Remember that once a corporation is formed, it .s.ally follows that all promoterNs contracts get
ratified beca.se the corporation act.ally arises o.t of these contracts) /he corporation .s.ally has no
choice) 4t rarely re:ects the contracts for s.ch wo.ld be commercial s.icide) Once the corporation is
formed, the promoterNs contract of the corporation 'if the latter accepts- and not the promoterNs) /his
is why the promoter, once the corporation accepts, escapes liability) Remember that a promoter in a
promoterNs contract signs not in his own name b.t always for and in behalf of the corporation)
C; <hat are the three theories in pre5incorporation contractsD
/heory V1 > /herefore, since a promoterNs contract is really the promoterNs own, the only reason why
the corporation, once it is organi?ed becomes liable is when the corporation adopts it as its own) /he
promoterNs real contract theory is one of the three theories by which to validate a contract prior to
incorporation)
/heory V2 > /he 2
nd
theory as adopted by =.rispr.dence is what is termed as a contin.ing offer) /he
contin.ing offer that eists as to the time of the iss.ance of the certificate of incorporation) And if it
is accepted, then the offer means the acceptance, and there arises a contract)
/heory V1 > Once the promoter enters into a contract for and in behalf of a non5eistent principal,
the promoter becomes personally liable li8e an agent who acts witho.t a.thority from the principal)
/he contract entered into then is valid .nless the agent acted witho.t a.thority) B.t it is possible for
the contract to be adopted by the principal by accepting it)
4n all three instances, there is deemed to be a valid contract of a valid offer) /hat is the basis of the
promoterNs contract > so that the people will be willing to ris8 witho.t m.ch fear, investing their
money into a vent.re prior to the incorporation of a company or a corporation)
C; $romoter v) Agent
A; /he promoters are not the corporation itself, and altho.gh they may be regarded, for
certain p.rposes as s.staining to the corporation a relationship similar to that of an agent,
strictly spea8ing they cannot be regarded as s.ch, there being at that time no eisting
principal)
C; $romoter v) /r.stee
A; A promoter is also sometimes li8ened to a tr.stee) B.t a tr.stee is s.pposed to be entirely
disinterested, while persons engaged in promotion epect to receive and see8 to obtain a liberal
award or profit for their initiative)
1) De $acto C'($'()t"'% 'Sec) 22-
Sec) 22 Ge Facto %orporations > /he d.e incorporation of any corporation claiming in good
faith to be a corporation .nder this %ode, and its right to eercise corporate powers, shall not
be in7.ired into collaterally in any private s.it to which s.ch corporation may be a party) S.ch
in7.iry may be made by the Solicitor Eeneral in a 7.o warranto proceeding)
"very corporation is deemed de :.re .ntil proven otherwise)
Ge =.re %orporation > formed in accordance with law# perfectly incorporated# conse7.ences;
separate :.ridical personality and perfect liability)
Ge Facto %orporation > formed also in accordance with law b.t falls short of the re7.irements
provided by law) S.ch is awarded a separate :.ridical personality, it may th.s enter into
contracts, it may s.e and be s.ed 'note; third parties may s.e the corporation, incorporators
may s.e b.t the corporation cannot s.e-) (ote also that s.ch has imperfect liability only
the actors will be held liable) 4n proceeding against s.ch, compliance with d.e process m.st
be had)
/he doctrine of de facto corporation applies as to the first level relationship 'as between the
State and corporations- and also to the third level of relationship 'as between third persons
and corporations-) 4f it primarily concerns the first level, why does it draw its vitality from the
third levelD Beca.se witho.t s.ch, transactions shall have no effect b.t with s.ch, despite the
defects, the contracts are valid and enforceable) B.t beca.se of its primary relation to the
first level, third persons cannot 7.estion the legal personality of s.ch de facto corporation)
31
Only the State thro.gh a 7.o warranto proceeding may do s.ch)
(ot all corporations which lac8 elements are de facto corporations)
"lements for "istence of Ge Facto %orporation;
1- Valid law .nder which it is incorporated; /he %orporation %ode
2- Attempt in good faith to incorporate > colorable compliance; /he corporation m.st have filed
its Articles of 4ncorporation and the S"% d.ly iss.ed a %ertificate of 4ncorporation) /he
minim.m re7.irement for this re7.isite is the iss.ance of a certificate s.ch that even if yo.
honestly believed that yo. incorporated 'and all the other re7.isites are present-, it is still not
a de facto corporation)
/he above is need to prove reliance in good faith)
4f any of the above element is absent can the principle be invo8ed by third personsD
(o, b.t they may have a remedy .nder the principle of corporation by estoppel) %an
s.ch be .sed in all instancesD (o, when both parties 8new that no corporation eisted,
s.ch may not be invo8ed)
4ss.ance of certificate of incorporation > minim.m re7.irement .nder this n.mber)
1- Ass.mption of corporate powers; 9inim.m re7.irement; election of the Board of Girectors)
C; <hy m.st there be an election of the BoGD
A; /he basic principle is a de facto corporation is a m.t.al going abo.t of the transaction in good
faith) Since the corporation has a :.ridical personality, the only way by which it can be said that
there was good faith in entering a transaction is that there m.st be a BoG by which a corporation
can act) 4f there is no BoG there is no good faith on the part of the corporation beca.se it 8nows
that it can only act thro.gh the BoG not on the part of the parties dealing with the corporation
beca.se it 8nows that there m.st be BoG for the corporation to bind itself) /his is also important
beca.se this is by which the corporation manifests itself) 'Remember; notion of a ghost > A ghost
manifest itself thro.gh signs, in the same manner, a corporation manifests its eistence thro.gh
the eistence of the BoG-)
4)5 Elements1 a!rnold Hall v. Piccio, 03 $hil) 31* '1,+2-)
AR(O&G MA&& v) $4%%4O
Facts; $etitioner Arnold Mall and Bradley Mall and respondent Fred Brown, "mma Brown, Mipolita
%hapman and %eferino Abella signed and ac8nowledged the Articles of 4ncorporation of the Far
"astern &.mber and %ommercial %o), 4nc) a general l.mber b.siness) 21,*20 shares of stoc8 were
s.bscribed and f.lly paid for and certain properties were transferred to the corporation)
/he Articles of 4ncorporation were filed with the S"% for the iss.ance of the corresponding certificates
of incorporation) /he corporation proceeded to do b.siness)
$ending the iss.ance of the certificates by S"%, the respondents Brown et) al) filed before the %F4 of
&eyte a civil case entitled @Fred Brown v) Arnold MallA alleging among others, that the Far "astern
&.mber and %ommercial %o) was an .nregistered partnership# that they wish to have it dissolved
beca.se of a bitter dissension among the members, mismanagement and fra.d by the managers and
heavy financial losses) Mall, et) al) filed a motion to dismiss alleging the lac8 of :.risdiction by the
co.rt) =.dge $iccio ordered the dissol.tion of the company)
Meld; /he S"% had not iss.ed the corresponding certificate of incorporation) All of them 8now or
o.ght to 8now that the personality of a corporation begins to eist only from the moment s.ch
certificate is iss.ed, not before) Mere, the complaining associate have not represented to the others
that they were incorporated any more than the defendant had made similar representations) Since
nobody was led to believe anything to his pre:.dice and damage, the principle of estoppel does not
apply)
/he section on de facto corporations does not apply in this case; '1- First, Far "astern &.mber, even
its stoc8holders, may not probably claim in @good faithA to be a corporation not having obtained the
certificate of incorporation) /h.s the imm.nity of collateral attac8 granted to corporations claiming in
Revised Bagtas Reviewer by Ve and Ocfe 2A
good faith to be a corporation does not apply here) '2- Second, this s.it is not one in which the
corporation is a party) /his is a litigation between stoc8holders of the alleged corporation for the
p.rpose of obtaining its dissol.tion) "ven the eistence of a de :.re corporation may be terminated in
a private s.it for its dissol.tion between stoc8holders, witho.t intervention of the State)
%&V; /he de facto doctrine was form.lated to safeg.ard the sec.rity of commercial transactions
whenever they involve the corporation) $arties dealing with said corporation are sec.red by the fact
that the transactions entered into with said corporations may be s.ed .pon and they can recover)
/hat is why aside from the other two re7.isites there m.st be a set of officers 'i)e) ass.mption of
corporate powers- or directors beca.se of the principle that a corporation can only act thro.gh its
officers)
"ffect as to both parties; '1- cannot deny its eistence '2- liable as general partners)
(ot applicable to intra5corporate disp.tes, whyD '1- it is a third level doctrine '2- p.blic is not
epected to 8now, while the above are epected to 8now)
4f the other party 8nows of the non5eistence of the corporation there is no estoppel)
0. C'($'()t"'% 7y E3t'$$&# 'Sec) 21# aSalvatierra v. -arlitos, 121 $hil) 6+6 K1,+0LA a!lbert v.
6niversit& Publishing Co., 11 S%RA 0* K1,3+L# !sia Ban+ing Corp. v. Standard Products, *3
$hil) 1*+ K1,2*L# Madrigal Shipping Co., v. 7gilvie, ++ O)E) (o) 1+, p) 6111-
Sec) 21 %orporation by estoppel > All persons who ass.me to act as a corporation 8nowing it to
be witho.t a.thority to do shall be liable as general partners for all debts, liabilities and damages
inc.rred or arising as a res.lt thereof; $rovided, however, that when any s.ch ostensible
corporation is s.ed on any transaction entered by it as a corporation or any tort committed by it
as s.ch, it shall not be allowed to .se as a defense its lac8 of corporate personality)
SA&VA/4"RRA v) EAR&4/OS
Facts; Salvatierra owned a parcel of land in &eyte) She entered into a contract of lease with $hilippine
Fibers $rod.cers %o), 4nc) allegedly a corporation d.ly organi?ed and eisting .nder the $hilippine
laws, as represented by its $resident Ref.er?o) /he land will be leased for ten years and the lessor
wo.ld be entitled to 12R of the net income accr.ing from the harvest of any crop)
/he alleged corporation did not comply with said obligation) Salvatierra filed with the %F4 a complaint
against $F$% for acco.nting, rescission and damages) /he corporation defa.lted and the co.rt
rendered :.dgment in favor of Salvatierra) /he co.rt iss.ed a writ of eec.tion and the three parcels
of land .nder the name of Ref.er?o were attached beca.se no property of $F$% was fo.nd available)
Ref.er?o filed a motion claiming that the decision was n.ll and void since there was no allegation of
his personal liability) /he co.rt granted the motion and released his land from attachment) Mence,
this petition by Salvatierra)
Meld; /he fail.re of Salvatierra to specify Ref.er?oNs personal liability was d.e to the fact that
Salvatierra was .nder the impression that $F$%, represented by Ref.er?o was a d.ly registered
corporation, b.t s.bse7.ently, in7.iry with the S"% yielded otherwise) <hile as a general r.le, a
person who has contracted or dealt with an association in s.ch a way as to recogni?e its eistence as
a corporate body is estopped from denying the same in an action arising o.t of s.ch transaction or
dealing) Het, this doctrine is inapplicable where fra.d ta8es a part in said transaction) Mere Ref.er?o
gave no confirmation of denial as to $F$%Ns :.ridical personality and Salvatierra was made to believe
that the corporation was d.ly organi?ed)
/he grant of separate :.ridical personality to corporations refer merely to registered corporations and
cannot be made applicable to the liability of members of an .nincorporated association) Since an
organi?ation which, before the law, is non5eistent and has no personality and wo.ld be
incompetent to act and appropriate for itself the power and attrib.tes of a corporation, it cannot
create agents or confer a.thority on another to ct in its behalf, th.s, those who act or p.rport to act
as its representatives or agents do so witho.t a.thority and at their own ris8)
A person acting or p.rporting to act in behalf of a corporation which has no valid eistence ass.mes
s.ch privileges and obligations and becomes personally liable for contracts entered into or for other
3+
acts performed as s.ch agent)
Mere, Ref.er?o as president of the .nregistered corporation was the spirit behind the cons.mmation
of the lease contract, th.s, his liability cannot be limited or restricted to that imposed .pon corporate
SMNs) 4n acting on behalf of a corporation, which he 8new to be .nregistered, he ass.mes the ris8 of
reaping the conse7.ential damages or res.ltant rights, if any arising from the transaction)
A&B"R/ v) U(4V"RS4/H $UB&4SM4(E %O)
Facts; /he University $.blishing %o) 4nc) thro.gh its $resident =ose Ar.ego entered into a contract
with 9ariano Albert whereby the corporation agreed to pay a certain s.m in installments for the
ecl.sive right to p.blish his revised commentaries in the R$% and for his share in the previo.s sale
of the boo8Ns first edit edition) /he corporation failed to pay the second installment thereby ma8ing
the whole amo.nt d.e and demandable 'i)e) there was an acceleration cla.se-) Albert then s.ed the
corporation)
/he lower co.rt rendered :.dgment in favor of Albert and a writ of eec.tion was iss.ed against the
corporation) Albert however, petitioned for a writ of eec.tion against Ar.ego, as the real defendant,
stating that there is no s.ch entity as University $.blishing %o) 4nc) Albert anneed to his petition a
certification from the S"% saying that their records contain no s.ch registered corporation)
/he corporation co.ntered by saying that Ar.ego is not a party to this case and that, therefore,
AlbertNs petition sho.ld be denied) /he corporation co.ntered by saying that Ar.ego is not a party to
this case, and that therefore, AlbertNs petition sho.ld be denied) /he corporation, act.ally did not
want Ar.ego to be declared a party to the present case is beca.se there wo.ld be no need to
instit.te a separate action against Ar.ego to be declared a party to the present case is beca.se
there wo.ld then be a need to instit.te a separate action against Ar.ego# and if this is done, Ar.ego
can set .p the defense of prescription .nder the Stat.te of &imitations)
Meld;
1)- /he corporation cannot invo8e the doctrine of estoppel) /he fact of non5registration of the
corporation has not been disp.ted beca.se the corporation only raised the point that it and
not Ar.ego is the party defendant thereby ass.ming that the corporation is an eisting
corporation with an independent :.ridical personality) MO<"V"R, precisely on acco.nt of non5
registration, it cannot be considered a corporation not even a corporation de facto) 4t has
therefore no personality separate from Ar.ego# it cannot be s.ed independently) /he estoppel
doctrine has not been invo8ed and even if it had been, it is not applicable to the case at bar;
'a- Ar.ego had represented a non5eisting entity and ind.ced not only Albert b.t also the
co.rt to believe in s.ch representation 'b- Me signed the contract as president of the
corporation stating that this was a corporation d.ly organi?ed and eisting .nder the laws of
the $hilippines) One who ind.ced another to act .pon his willf.l misrepresentation that a
corporation was d.ly organi?ed and eisting .nder the law, cannot thereafter set .p against
his victim the principle of corporation by estoppel)
2)- Ar.ego is the real defendant as he had control over the proceedings) Mad Ar.ego been named
as party defendant instead of or together with the corporation, there wo.ld be no room for
debate as to his personal liability) Since he was not so named, matters of d.e process have
arisen) $arties to a s.it are persons who have a right to control the proceedings, to ma8e
defense, to add.ce and cross5eamine witnesses and to appeal from a decision) 4n the case at
bar, Ar.ego, was and in reality, the one who answered and litigated thro.gh his own firm as
co.nsel) Me was in fact, if not on name, the defendant) %learly then Ar.ego had his day in
co.rt as the real defendant and d.e process of law has been s.bstantially observed)
1)- Ar.ego is the real party in interest beca.se he reaped the benefits from the contract)
4)5 Nature of Doctrine
Fo.nded on principles of e7.ity and designed to prevent in:.stice and .nfairness, the
doctrine applies when persons ass.me to form a corporation and eercise corporate
Revised Bagtas Reviewer by Ve and Ocfe 2A
f.nctions and enter into b.siness relations with third persons) <here no third person is
involved in the conflict, there is no corporation by estoppel) A failed consolidation
therefore cannot res.lt in a consolidated corporation by estoppel) Lo.ano v. /e Los
Santos, 26* S%RA *+2 '1,,6-
A party cannot challenge the personality of the plaintiff as a d.ly organi?ed
corporation after having ac8nowledged same when entering into the contract with the
plaintiff as s.ch corporation for the transportation of its merchandise) 7hta /ev. Co. v.
Steamship Pompe&, *, $hil) 116 '1,23-)
*
A person who accepts employment in an .nincorporated charitable association is
estopped from alleging its lac8 of :.ridical personality) Christian Children$s ,und v. L*C,
16* S%RA 301 '1,0,-)
One who deals with an organi?ation which is not d.ly incorporated is not estopped to
deny its corporate eistence when his p.rpose is not to avoid liability) a'nt$l "(press
%ravel v. Court of !ppeals, 1*1 S%RA 36* '2222-)
4(/"R(A/4O(A& "B$R"SS /RAV"& v) %A
Facts; $hilippine Football Federation got tic8ets from petitioner travel agency for the S"A games and
trips to %hina and Brisbane) /wo partial payments were made) $etitioners wrote to Oahn 'president
of the federation- demanding the completion of the payment) Federation, thro.gh $ro:ect Eintong
Alay paid the amo.nt of $ 11,222) /hen Oahn iss.ed a personal chec8 for $ +2,222) After that, no
f.rther payments were made)
$etitioner then s.ed Oahn in his personal capacity and as president of the federation for the .npaid
balance for the p.rchased tic8ets as Oahn allegedly g.aranteed the said obligation) Oahn maintained
that he did not g.arantee the payment b.t merely acted as an agent of the Federation which has a
separate and distinct :.ridical personality)
R/%; Oahn is personally liable beca.se neither the travel agency nor Oahn add.ce any evidence
proving the corporate eistence of the federation) Being the president, its corporate eistence is
within the 8nowledge of Oahn and co.ld have easily denied specifically the assertions of petitioner
that it is a mere sports association) Vol.ntary .nincorporated associations have no power to enter
into, or to ratify, a contract) /he contract entered into by its officers or agents in behalf of the
association is not binding or enforceable against it) Agents and officers personally liable) %A;
reversed)
Meld; RA 111+ and $G 32* recogni?ed the :.ridical eistence of national sports associations) /he
power to adopt a constit.tion, raise f.nds, ac7.ire property, etc) indicate that the associations may
ac7.ire :.ridical personality) Mowever, s.ch does not a.tomatically ta8e place by the passage of the
laws) Before a corporation may ac7.ire :.ridical personality, the state m.st give its consent either in
the form of a special law or a general enabling act) (owhere can it be fo.nd in the 2 above
mentioned laws any provision creating the $hilippine Football Federation)
Before an entity may be considered as a national sports association, s.ch entity m.st be recogni?ed
by the accrediting organi?ations > $hilippine Amate.r Athletic Federation 'RA 111+- and Gept) of
Ho.th and Sports Gevelopment '$G 32*-) Altho.gh a copy of the constit.tion of the federation was
presented in co.rt, thye same does not prove that it had been recogni?ed) /herefore, the federation
is not a national sports association within the p.rview of the laws and that Oahn is personally
responsible for the obligation)
Under the law on estoppel incl.ding that .nder Sec) 21 of %orporation %ode, those
acting on behalf of an ostensible corporation and those benefited b& it, +nowing it to be
without valid e(istence, are held liable as general partners) aLim %ong Lim v. Philippine
,ishing -ear 'ndustries, 'nc., 116 S%RA 620 '1,,,-)
&49 /O(E &49 v) $M4&4$$4(" F4SM4(E E"AR 4(GUS/R4"S
*/he same principle applied in Compania !gricole de 6ltramar v. *e&es, * $hil) 1 K1,11L b.t that case
pertained to a commercial partnership which re7.ired registration in the registry .nder the terms of the %ode of
%ommerce-)
36
Facts; Antonio %h.a and $eter Hao on behalf of Ocean C.est Fishing %o) entered into a contract with
$hil) Fishing Eear 4nd.stries 4nc) for the p.rchase of fishing nets and floats) /hey claimed that they
were a fishing vent.re with &im /ong &im who was however not a signatory to the contract) /hey
failed to pay and so $FE4 filed a collection case with a prayed for a writ of preliminary attachment)
/he case was filed against %h.a, Hao and &im beca.se it was fo.nd that Ocean C.est was a non5
eistent corporation as shown by the certification from S"%) %h.a admitted liability and Hao waived
his right to cross5eamine and present evidence beca.se he failed to appear while &im filed a
co.nterclaim and a cross5claim) %o.rt granted the writ of attachment and ordered the A.ction Sale
of the FJB &o.rdes which was previo.sly attached) /rial co.rt r.led that $FE4 was entitled to the <rit
and %h.a, Hao and &im were :ointly liable as general partners)
Meld;
*)- &im was contesting that the %A r.led that there was a partnership in the %ompromise
Agreement and alleges that he had no direct participation in the negotiations and was merely
leasing FJB &o.rdes to %h.a and Hao Facts fo.nd by the /% and %A showed that there was
a partnership formed by the three of them) /hey initially p.rchased two boats thro.gh a loan
from &imNs brother and as sec.rity, was placed in the name of &im /ong &im) /he repairs and
s.pplies were sho.ldered by %h.a and Hao) A civil case was filed by %h.a and Hao against &im
for n.llity of commercial doc.ments, reformation of contracts and declaration of ownership of
fishing boatsTwhich was settled amicably) 4n the %ompromise Agreement, it was revealed
that they intended to pay the loan from =es.s &im by selling the boats and to divide among
them the ecess or loss) /herefore it was clear that a partnership eisted which was not solely
based on the agreement) 4t was merely an embodiment of the relationship among parties)
+)- &im alleges that he was merely a &"SSOR by showing the %ontract of &ease and registration
papers of the boats, incl.ding FJB &o.rdes where the nets were fo.nd As fo.nd by the
lower co.rts, the boats were registered to &im only as sec.rity for the loan that was granted
to the partnership by the brother of &im, which was not an .ncommon practice) Aside from
the fact that it was abs.rd for &im to sell the boats to pay the debt he did not inc.r, if needed
he was merely leasing the boats to %h.a and Hao)
3)- &im contests his liability by saying that only those who dealt in the name of the ostensible
corporation sho.ld be held liable) Mis name was not in any of the contracts and never dealt
with $FE4 Sec) 21 > All persons who ass.me to act as a corporation 8nowing it to be witho.t
a.thority to do so shall be liable as general partners for all debts, liabilities and damages
inc.rred or arising as a res.lt thereof# $rovided however that when any s.ch ostensible
corporation is s.ed, on any transaction entered by it as a corporation or ant tort committed
by it as s.ch, it shall not be allowed to .se as a defense its lac8 of corporate personality) "ven
if the ostensible corporate entity is proven to be non5eistent, a party may be estopped from
denying its corporate eistence beca.se an .nincorporated association has no personality
and wo.ld be incompetent to act and appropriate for itself the power and attrib.tes of a
corporation as provided by law) 4t cannot create agents or confer a.thority on another to act
on its behalf) /h.s, those who act or p.rport to act as its representatives do so witho.t
a.thority and at their own ris8) %learly, &im benefited from the .se of the nets fo.nd inside
FJB &o.rdes which was proved to be an asset of the partnership) Me in fact 7.estioned the
attachment beca.se it has effectively interfered with the .se of the vessel) /ho.gh
technically, he did not directly act on behalf of the corporation, however, by reaping the
benefits of the contract entered into by persons he previo.sly had an eisting relationship
with, he is deemed part of said association and is covered by the doctrine of corporation by
estoppel)
%&V; $ioneer case actors who 8new of corporationNs non5eistence are liable as general partners
while actors who did not 8now are liable as limited partners, passive investors are not liable# &im
teaches .s that even passive investors sho.ld be held liable provided they benefited from s.ch
transactions)
475 T*' L&1&#3+ 4"5 W"t! D6();-EF )%- 4""5 W"t!';t D6();-F
Revised Bagtas Reviewer by Ve and Ocfe 2A
<hen the incorporators represent themselves to be officers of the corporation which
was never d.ly registered with the S"%, and engage in the name of the p.rported
corporation in illegal recr.itment, they are estopped from claiming that they are not liable
as corporate officers .nder Sec) 2+ of %orporation %ode which provides that all persons
who ass.me to act as a corporation 8nowing it to be witho.t a.thority to do so shall be
liable as general partners for all the debts, liabilities and damages inc.rred or arising as a
res.lt thereof) People v. -arcia, 261 S%RA 321 '1,,6-# People v. Pineda, E)R) (o) 116212,
10 April 1,,6 '.np.b-)
4. TRUST 6UND DOCTRINE
See V4&&A(U"VA, !%he %rust ,und /octrine 6nder Philippine Corporate Setting,! 11
A/"("O &)=) '(o) 1, Feb) 1,06-)
/he capital stoc8 of the corporation especially its .npaid s.bscriptions is a tr.st f.nd for
the benefit of the general creditors of the corporation)
)5 Commercial<Common !a( Premise1 E/uit' *ersus Debts 'Art) 2213, %ivil %ode-
Art) 2213 /he debtor is liable with all his property, present and f.t.re, for the f.lfillment of
his obligations, s.b:ect to the eceptions provided by law)
75 Nature of Doctrine1 a7ng @ong v. %iu, *21 S%RA 1 '2221-)
O(E HO(E v) /4U
Facts; 4n 1,,*, the constr.ction of the 9asagana %itimall in $asay %ity by First &andlin8 Asia
Gevelopment %orporation 'F&AG%- owned by the /i. family was threatened by the foreclos.re by the
$(B for their $ 1,2 9 debt) 4n order to stave off the threat the /i. family together with the Ong
family agreed to restr.ct.re F&AG% and created a pre5s.bscription agreement and each were to
maintain e7.al shareholdings) /he Ong family invested a total s.m of $ 1,2 9 to the corporation
while the /i. family incl.ded several real estate properties as added capital for the restr.ct.red
corporation) /he Ong and /i. families now owned 1,222,222 shares each of F&AG%) After all the
debts were paid, the peace between Ong and /i. did not last) /i. claimed rescission based on
s.bstantial breach by Ong .pon the pre5s.bscription agreement) Ong, on the other hand maintained
that it was /i. who committed the breach beca.se one of the properties that they were s.pposed to
incl.de in the agreement was in fact already in the real estate owned by F&AG%) /he S"% approved
the rescission 'both parties were ret.rn to stat.s 7.o, $ 1,2 9 to the Ong family and all the
remaining F&AG% assets to the /i. family, which incl.ded the now finished mall val.ed at more than
$ 1B- and the %A affirmed the decision with slight modifications)
Meld;
1)- 4s rescission the proper remedy for an intra5corporate disp.te (o, the %orporation %ode,
S"% r.les and even the R.les of %o.rt provide for appropriate and ade7.ate intra5corporate
remedies, other than rescission, in sit.ations li8e this) Rescission is certainly not one of them,
specially if the party as8ing for it has no legal personality to do so 'beca.se it is a corporation,
/i. family is not the corporation- and the re7.irements of the law therefore have not been
met) A contrary doctrine will tread on etremely dangero.s gro.nd beca.se it will allow :.st
any stoc8holder, for :.st abo.t any real or imagined offense, to demand rescission of his
s.bscription and call for the distrib.tion of some part of the corporate assets to him witho.t
complying with the re7.irements of the %orp) %ode)
2)- Eranting rescission is a proper remedy, does it violate the /FG Hes it will violate the /FG
and the proced.res for valid distrib.tion of assets and property .nder the %orp) %ode) /he
/FG provides that s.bscription to the capital stoc8 of a corporation constit.te a f.nd to which
the creditors have a right to loo8 for the satisfaction of their claims) /he doctrine is the
.nderlying principle in the proced.re for the distrib.tion of capital assets, in the %orp) %ode
which allows the distrib.tion of corporate capital only in three instances; '1- amendments of
the Articles of 4ncorporation to red.ce the a.thori?ed capital stoc8 're7.ires Board Resol.tion
and stoc8holdersNs meeting- '2- p.rchase of redeemable shares by the corporation,
regardless of the eistence of .nrestricted retained earnings and '1- dissol.tion and event.al
li7.idation of the corporation) 4n the instant case, the rescission of the pre5s.bscription
3,
agreement will effectively res.lt in the .na.thori?ed distrib.tion of the capital assets and
property of the corporation, thereby violation the /FG and the %orp) %ode, since the rescission
of a s.bscription agreement is not one of the instances when distrib.tion of capital assets and
property of the corporation is allowed)
Under the tr.st f.nd doctrine, the capital stoc8, property and other assets of the
corporation are regarded as e7.ity in tr.st for the payment of the corporate creditors)
Comm. of 'nternal *evenue v. Court of !ppeals, 121 S%RA 1+2 '1,,,-)
/he @tr.st f.ndA doctrine considers the s.bscribed capital stoc8 as a tr.st f.nd for the
payment of the debts of the corporation, to which the creditors may loo8 for satisfaction)
Until the li7.idation of the corporation, no part of the s.bscribed capital stoc8 may be
t.rned over or released to the stoc8holder 'ecept in the redemption of the redeemable
shares- witho.t violating this principle) /h.s dividends m.st never impair the s.bscribed
capital stoc8# s.bscription commitments cannot be condoned or remitted# nor can the
corporation b.y its own shares .sing the s.bscribed capital as the consideration therefore)
%C v. Court of !ppeals, 111 S%RA +20 '1,,,-)
/he re7.irement of .nrestricted retained earnings to cover the shares is based on the
tr.st f.nd doctrine which means that the capital stoc8, property and other assets of a
corporation are regarded as e7.tiy in tr.st for the payment of corporate creditors) /he
reason is that creditors of a corporation are preferred over the stoc8holders in the
distrib.tion of corporate assets) /here can be no distrib.tion of assets among the
stoc8holders witho.t first paying corporate creditors) Mence, any disposition of corporate
f.nds to the pre:.dice of creditors is n.ll and void) Boman "nvironmental /ev. Corp. v.
C!, 136 S%RA +*2 '1,00-)
.5 T' P;(.!)3& O*% S!)(&3 'Secs) 0, *1, *1 and 122, last paragraph# Phil. %rust Co. v.
*ivera, ** $hil) *3, K1,21L# Steinberg v. 1elasco, +2 $hil) ,+1 K1,2,L-
Sec) 0 Redeemable Shares > Redeemable shares may be iss.ed by the corporation when
epressly so provided in the articles of incorporation) /hey may be p.rchased or ta8en .p
by the corporation .pon the epiration of a fied period, regardless of the eistence of
.nrestricted retained earnings in the boo8s of the corporation, and .pon s.ch terms and
conditions as may be stated in the articles of incorporation, which terms and conditions
m.st also be stated in the certificate of stoc8 representing said shares)
Sec) *1 $ower to ac7.ire own shares > A stoc8 corporation shall have the power to
p.rchase or ac7.ire its own shares for a legitimate corporate p.rpose or p.rposes,
incl.ding b.t not limited to the following cases; $rovided, that the corporation has
.nrestricted retained earnings in its boo8s to cover the shares to be p.rchased or
ac7.ired; '1- to eliminate fractional shares arising o.t of stoc8 dividends# '2- to collect or
compromise an indebtedness to the corporation, arising o.t of .npaid s.bscription, in a
delin7.ency sale, and to p.rchase delin7.ent shared sold d.ring said sale# and 1- to pay
dissenting or withdrawing stoc8holders entitled to the payment for their shares .nder the
provisions of this %ode)
Sec) *1 $ower to declare dividends > /he board of directors of a stoc8 corporation may
declare dividends o.t of the .nrestricted retained earnings which shall be payable in cash,
in property, or in stoc8 to all stoc8holders on the basis of o.tstanding stoc8 held by them;
$rovided, /hat any cash dividends d.e on delin7.ent stoc8s shall first be applied to the
.npaid balance on the s.bscription pl.s costs and epenses, while stoc8 dividends shall
be withheld from the delin7.ent stoc8holder .ntil his .npaid s.bscription is f.lly paid;
$rovided f.rther, /hat no stoc8 dividend shall be iss.ed witho.t the approval of
stoc8holders representing not less than two5thirds of the o.tstanding capital stoc8 at a
reg.lar or special meeting d.ly called for that p.rpose)
Stoc8 corporations are prohibited from retaining s.rpl.s profits in ecess of one h.ndred
Revised Bagtas Reviewer by Ve and Ocfe 2A
'122R- per cent of their paid5in capital stoc8, ecept; '1- when :.stified by definite
corporate epansion pro:ects or programs approved by the board of directors# or '2- when
the corporation is prohibited .nder any loan agreement with any financial instit.tion or
creditor, whether local or foreign, from declaring dividends witho.t hisJher consent and
s.ch consent has not yet been sec.red# or '1- when it can be clearly shown that s.ch
retention is necessary .nder special circ.mstances obtaining in the corporation, s.ch as
when there is need for special reserve for probable contingencies)
Sec) 122 %orporate &i7.idation > "very corporation whose charter epires by its own
limitation or is ann.lled by forfeit.re or otherwise, or whose corporate eistence for other
p.rposes is terminated in any other manner, shall nevertheless be contin.ed as a body
corporate for three '1- years after the time when it wo.ld have been dissolved, for the
p.rpose of prosec.ting and defending s.its by or against it and enabling it to settle and
close it affairs, to dispose of and convey its property and to distrib.te its assets, b.t not
for the p.rpose of contin.ing the b.siness for which it was established)
At any time d.ring said three '1- years, the corporation is a.thori?ed and empowered to
convey all of its property to tr.stees for the benefit of stoc8holders, members, creditors,
and other persons in interest) From and after any s.ch conveyance by the corporation of
its property in tr.st for the benefit of its stoc8holders, members, creditors and others in
interest, all interest which the corporation had in the property terminates, the legal
interest vests in the tr.stees, and the beneficial interest in the stoc8holders, members,
creditors or other persons in interest)
Upon the winding .p of corporate affairs, any asset distrib.table to any creditor or
stoc8holder or member who is .n8nown or cannot be fo.nd shall be escheated to the city
or m.nicipality where s.ch assets are located)
"cept by decrease of capital stoc8 and as otherwise allowed by this %ode, no corporation
shall distrib.te any of its assets or property ecept .pon lawf.l dissol.tion and after
payment of all its debts and liabilities)
4-5 R&3."33"'% ', S;73.("$t"'% A9(&&/&%t B)3&- '% B(&).!
/he violation of terms embodied in a s.bscription agreement, with are personal
commitments, do not constit.te legal gro.nd to rescind the s.bscription agreement
since s.ch wo.ld violate the /r.st F.nd Goctrine and the proced.res for the valid
distrib.tion of assets and property .nder the %orporation %ode) @4n the instant case,
the rescission of the $re5S.bscription Agreement will effectively res.lt in the
.na.thori?ed distrib.tion of the capital assets and property of the corporation, thereby
violating the /r.st F.nd Goctrine and the %orporation %ode, since the rescission of a
s.bscription agreement is not one of the instances when distrib.tion of capital assets
and property of the corporation is allowed)A 7ng @ong v. %iu, *21 S%RA 1 '2221-)
4&5 D"3t("7;t"'% ', C'($'()t& A33&t3
@/he distrib.tion of corporate assets and property cannot be made to depend on the
whims and caprices of the stoc8holders, officers or directors of the corporation, or even,
for that matter, on the earnest desire of the co.rt a 4uo Zto prevent f.rther s7.abbles and
f.t.re litigationsN .nless the indispensable conditions and proced.res for the protection of
the corporate creditors are followed) Otherwise, the Zcorporate peaceN la.dably hoped for
by the co.rt will remain nothing b.t a dream beca.se this time, it will be the creditorsN
t.rn to engage in Zs7.abbles and litigationsN sho.ld the co.rt order an .nlawf.l
distrib.tion in blatant disregard of the /r.st F.nd Goctrine)A 7ng @ong v. %iu, *21 S%RA 1
'2221-)
/he tr.st f.nd doctrine applies in the following cases; '1- where the corporation has
distrib.ted its capital among the stoc8holders witho.t providing for the payment of creditors
'2- where it had released s.bscribers to capital stoc8 from their s.bscription receivables '1-
where it had transferred corporate property in fra.d of its creditors and '*- where the
corporation is insolvent)
Stat.tory references; '1- Sec) 122 of the %orp) %ode governing dissol.tion of corporations and
61
their li7.idation when it provides that @ecept by decrease of capital stoc8 and as otherwise
allowed by this %ode, no corporation shall distrib.te any of its assets or property ecept .pon
lawf.l dissol.tion and after payment of all its debts and liabilities)A '2- S"% R.les governing
Redeemable and /reas.ry Shares epressly adopts the doctrine as follows, @the o.tstanding
capital stoc8 of a corporation, incl.ding .npaid s.bscriptions, shall constit.te a tr.st f.nd for
the benefit of its creditors which shall not be ret.rned to the stoc8holders by rep.rchase of
shares or otherwise, ecept in the manner as provided for .nder the %orporation %ode and
this r.les)
%overage of /r.st F.nd Goctrine > adopted the two prec.rsors of the tr.st f.nd doctrine which
is the a)- capital impairment r.le and the b)- profit r.le) A fied capital m.st be preserved for
protecting the claims of creditors so that dividend distrib.tions to stoc8holders sho.ld be
limited to profits earned or acc.m.lated by the corporation) 4n a solvent corporation, the tr.st
f.nd doctrine encompasses only the capital stoc8)
1)- %overage of capital stoc8s > covers @capital stoc8#A the protection by the doctrine .pon
corporation not in a state of insolvency b.t only .p to the etent of the @capital stoc8A of the
corporation)
2)- Retained earnings > altho.gh part of the stoc8holderNs e7.ity, do not constit.te part of the
@capital stoc8)A 4t is not covered by the doctrine) /he corporation is at liberty to declare and
pay o.t dividends from its assets)
1)- O.tstanding capital stoc8 > total shares of stoc8 iss.ed to s.bscribers or stoc8holders
whether or not f.lly or partially paid 'as long as there is a binding s.bscription agreement-
ecept treas.ry shares 'Sec) 116 -)
*)- $ar val.e stoc8 > capital stoc8 represented by aggregate par val.e of all shares iss.ed and
s.bscribed) 4f par val.e shares are sold at premi.m, ecess is not treated as legal
capitalJcapital stoc8 b.t can be declared as stoc8 dividends) /his stoc8 dividends fall within
the ambit of the /r.st F.nd doctrine)
+)- (o par val.e stoc8 > legal capital W total consideration received for the shares of stoc8) "ntire
consideration for no par val.e stoc8 treated as capital and not available for distrib.tion as
dividends)
F.nds received by a corporation > to cover s.bscription payment on increase in a.thori?ed capital
stoc8 prior to approval thereof of the S"% wo.ld not be covered by the /FG) As a /F, this money is
still withdrawable by any of the s.bscribers at any time before iss.ance of the corresponding shares
of stoc8, .nless there is a pre5s.bscription to the contrary)
VII. ARTICLES O6 INCORPORATION
See relevant portions of V4&&A(U"VA, Corporate Contract Law, 10 A/"("O &)=) 1 '(o) 2,
=.ne 1,,*-)
/he article of incorporation is;
1)- A %O(/RA%/ > an agreement that gives rise to obligations;
a)- Between the corporation and the state 'beca.se it is .nder the A4 by which the
state grants the primary franchise)- state manifests its consent thro.gh the S"%
while the corporation manifests its consent by the filing of the A4, thro.gh the
incorporators and event.ally thro.gh the Board of Girectors)
b)- Between the state and stoc8holders
c)- Between the corporation and stoc8holders the stoc8holders manifest their
Revised Bagtas Reviewer by Ve and Ocfe 2A
consent thro.gh their s.bscription of stoc8s and thro.gh voting as against the
corporation, the stoc8holders do not have individ.al standing b.t only standing as
a gro.p)
d)- Among stoc8holders in this sit.ation they now have individ.al standing)
e)- Between the stoc8holders and the Board of Girectors
f)- Between the corporation and the p.blic 'since the A4 is a p.blic doc.ment)-
2)- A $UB&4% GO%U9"(/ > beca.se it is registered with the S"%) S.ch wor8s with the doctrine
of p.blic notice that when the p.blic deals with the corporation, the contents of A4 binds
them whether they in fact have seen the A4 or not) <hen a person enters into a contract
or any transaction with a corporation whether or not he has chec8ed with the S"% the
terms and conditions of the A4, he will be bo.nd by it) Me cannot claim ignorance of the
charter of the corporation)
. N)t;(& ', C!)(t&(+ /he charter is in the nat.re of a contract between the corporation and
the government) a-overnment of P.'. v. Manila *ailroad Co), +2 $hil) 3,, '1,2,-)
EOV"R(9"(/ OF $)4) v) 9A(4&A RA4&ROAG %O)
Facts; /he E$4 filed a petition for mandam.s in the S% to compel the 9anila Railroad and =ose
$ae?, its manager to provide and e7.ip the telegraph poles of the company in /arlac and &a
Union with crosspieces for 3 telegraph wires belonging to the government which, it alleged, are
necessary for p.blic service between certain m.nicipalities) $etitioner relies on Sec) 0* of Act (o)
1*+, which provides that the railroad company shall establish a telegraph line for the .se of the
railroad and that s.ch posts may be .sed for government wires and shall be s.fficient for
crosspieces to carry the n.mber of wires which the government may consider necessary for
p.blic service) $etitioner contends that since 3 crosspieces are now necessary for p.blic service,
the company sho.ld provide s.fficient crosspieces) Respondent answers by saying that the
%harter of 9anila Railroad 'Act (o) 1+12- repealed Sec) 0* of Act 1*+, and contended that the
Eovernment is entitled to only * wires)
Meld; $etition denied) 4nasm.ch as Act (o) 1+12 is the charter of the 9anila Railroad %o)
constit.tes a contract between the corporation and the government, it wo.ld seem that the
corporation is governed by its contract and not by the provisions of the general law) B.t from a
reading of the charter it will be seen that there is no indication that the government intended to
impose .pon said company any other conditions or obligations not epressly fo.nd in the said
contract or charter) Section 0* of the %orp) &aw was intended to apply to all railways in the
$hilippines which did not have a special charter or contract) Act (o) 1+12 applies only to 9anila
Railroad and being a special charter, its adoption had the effect of s.perseding the provisions of
the corporation law which are applicable to railroads in general)
/he charter of a corporation is a contract between three parties; '1- it is a contract between the
state and the corporation to which the charter is granted '2- it is a contract between stoc8holders
and the state '1- it is a contract between the corporation and its stoc8holders) A special charter
constit.tes a contract between the corporation and the government and as s.ch are both e7.ally
bo.nd by its provisions) For the State to impose an obligation or a d.ty .pon the respondent
corporation, not epressly provided in the charter wo.ld amo.nt to a violation of said contract)
/he provisions of Act 1*+, relate to the n.mber of wires which the government may place .pon
poles of the company are different and more onero.s than the provisions of the charter)
(O/"; Articles of 4ncorporation cannot prevail over stat.tory provisions) S.ch cannot overcome
the law) Mowever in the case of E$4, its special charter overr.led the Een) &aw on the gro.nd that
the former is both a contract and a law) /h.s, its charter as a law creates an amendment to all
other laws) 4n the same manner, if the former were a mere contract then the case wo.ld have
been decided differently)
2. P('.&-;(& )%- D'.;/&%t)(y R&B;"(&/&%t3 'Sec) 1* and 1+-
61
Sec) 1* %ontents of the Articles of 4ncorporation > All corporations organi?ed .nder this code
shall file with the S"% articles of incorporation in any of the official lang.ages d.ly signed and
ac8nowledged by all of the incorporators, containing s.bstantially the following matters,
ecept as otherwise prescribed by this %ode or by special law)
1) /he name of the corporation#
2) /he specific p.rpose or p.rposes for which the corporation is being incorporated) <here a
corporation has more than one stated p.rpose, the articles of incorporation shall state
which is the primary p.rpose and which isJare the secondary p.rpose or p.rposes;
$rovided, that a non5stoc8 corporation may not incl.de a p.rpose which wo.ld change or
contradict its nat.re as s.ch#
1) /he place where the principal office of the corporation is to be located, which m.st be
within the $hilippines#
*) /he term for which the corporation is to eist#
+) /he names, nationalities and residences of the incorporators#
3) /he n.mber of directors and tr.stees which shall not be less than five nor more than
fifteen#
6) /he names, nationalities and residences of persons who shall act as directors or tr.stees
.ntil the first reg.lar directors or tr.stees are d.ly elected and 7.alified in accordance
with this %ode#
0) 4f it be a stoc8 corporation, the amo.nt of its a.thori?ed capital stoc8 in lawf.l money of
the $hilippines, the n.mber of shares to which it is divided, and in case the share are par
val.e shares, the par val.e of each, the names, nationalities and residences of the original
s.bscribers, and the amo.nt s.bscribed and paid by each on his s.bscription, and if some
or all of the shares are witho.t par val.e, s.ch fact m.st be stated#
,) 4f it be a non5stoc8 corporation, the amo.nt of its capital, the names, nationalities and
residences of the contrib.tors and the amo.nt contrib.ted by each# and
12) S.ch other matters as are not inconsistent with law and which the incorporators may
deem necessary and convenient)
/he S"% shall not accept the articles of incorporation of any stoc8 corporation .nless
accompanied by a sworn statement of the /reas.rer elected by the s.bscribers showing that
at least twenty5five percent '2+R- of the a.thori?ed capital stoc8 of the corporation has been
s.bscribed and at least twenty5five percent '2+R- of the total s.bscription has been f.lly paid
to him in act.al cash andJor in property the fair val.ation of which is e7.al to at least twenty5
five percent '2+R- of said s.bscription, s.ch paid5.p capital being not less than $+,222)
Sec) 1+ Forms of Articles of 4ncorporation > Unless otherwise prescribed by special law,
articles of incorporation of all domestic corporations shall comply s.bstantially with the
following form; T
(O/"; /he form goes into the validity and enforceability of the Articles of 4ncorporation)
)5 As to Number and Residenc' of "ncorporators 'Sec) 12-#
Sec) 12 (.mber and C.alifications of 4ncorporators > Any n.mber of nat.ral person not less
than five b.t not more than fifteen, all of legal age and a ma:ority of whom are residents of
the $hilippines, may form a private corporation for any lawf.l p.rpose or p.rposes) "ach of
the incorporators of a stoc8 corporation m.st own or be a s.bcriber to at least one share of
the capital stoc8 of the corporation)
(O/"; 4ncorporators m.st be warm5blooded individ.als for p.rposes of acco.ntability) /hey m.st
not be more than fifteen for pragmatic reasons, and they m.st be less than five beca.se two and
fo.r create a deadloc8, while three is not as efficient as five) '4nstit.tion of the Board of Girectors
is a clear embodiment of the corporationNs centrali?ed management)-
75 Corporate Name 'Secs) 10, 1*'1- and *2# *ed Line %rans. v. *ural %ransit, 32 $hil) +*,
K1,1*L-)
Revised Bagtas Reviewer by Ve and Ocfe 2A
Sec) 10 %orporate (ame > (o corporate name may be allowed by the S"% if the proposed
name is identical or deceptively conf.sing or similar to that of any eisting corporation or to
any other name already protected by law or is patently deceptive, conf.sing or contrary to
eisting laws) <hen a change in the corporate name is approved, the %ommission shall iss.e
an amended certificate of incorporation .nder the amended name)
Sec) *2 $ower to invest corporate f.nds in another corporation or b.siness or for any other
p.rpose > S.b:ect to the provisions of this %ode, a private corporation may invest its f.nds in
any other corporation or b.siness or for any other p.rpose other than the primary p.rpose for
which it was organi?ed when approved by a ma:ority of the board of directors or tr.stees and
ratified by the stoc8holders representing 2J1 of the o.tstanding capital stoc8 or at least 2J1 of
the members in case of non5stoc8 corporations, at a stoc8holdersN or members meeting d.ly
called for the p.rpose) <ritten notice of the proposed investment and the time and place of
the meeting shall be addressed to each stoc8holder or member at his place of residence as
shown on the boo8s of the corporation and deposited to the addresse in the post office with
postage prepaid, or served personally; $rovided; /hat any dissenting stoc8holder shall have
appraisal right as provided in this %ode; $rovided, however, /hat where the investment by the
corporation is reasonably necessary to accomplish its primary p.rpose as stated in the
articles of incorporation, the approval of the stoc8holders or members shall not be necessary)
$arties organi?ing a corporation m.st choose a name at their peril# and the .se of a
name similar to one adopted by another corporation, whether a business or a nonprofit
organi.ation, if misleading or li8ely to in:.re the eercise of its corporate f.nctions,
regardless of intent, may be prevented by the corporation having a prior right) !ng Mga
0aanib sa 'glesia ng /ios 0a& 0risto Hesus v. 'glesia ng /ios 0a& /risto )esus, 162 S%RA
161 '2221-)
Similarity in corporate names between two corporations wo.ld ca.se conf.sion to the
p.blic especially when the p.rposes stated in their charter are also the same type of
b.siness) 6niversal Mills Corp. v. 6niversal %e(tile Mills 'nc., 60 S%RA 32 '1,66-)
Section 10 of %orporation %ode epressly prohibits the .se of a corporate name which
is @identical or deceptivel& or confusingl& similar to that of an& e(isting corporation or to
an& other name alread& protected b& law or is patentl& deceptive, confusing or contrar&
to e(isting laws.B /he policy behind the foregoing prohibition is to avoid fra.d .pon the
p.blic that will occasion to deal with the entity concerned, the evasion of legal obligations
and d.ties, and the red.ction of diffic.lties of administration and s.pervision over
corporations) 'ndustrial *efractories Corp. v. Court of !ppeals, 1,2 S%RA 2+2 '2222-#
L&ceum of the Philippines v. Court of !ppeals, 21, S%RA 312, 31+ '1,,1-)
A corporation has no right to intervene in a s.it .sing a name, not even its acronym,
other than its registered name, as the law re7.ires and not another name which it had not
registered) Laureano 'nvestment and /ev. Corp. v. Court of !ppeals, 262 S%RA 2+1
'1,,6-)
/here wo.ld be no denial of d.e process when a corporation is s.ed and :.dgment is
rendered against it .nder its .nregistered trade name, holding that @KaL corporation may
be s.ed .nder the name by which it ma8es itself 8nown to its wor8ers)A Pison<!rceo
!gricultural /ev. Corp. v. L*C, 26, S%RA 112 '1,,6-)
A corporation may change its name by the amendment of its articles of incorporation,
b.t the same is not effective .ntil approved by the S"%) Philippine ,irst 'nsurance Co. v.
Hartigan, 1* S%RA 2+2 '1,62-)
A change in the corporate name does not ma8e a new corporation, and has no effect
on the identity of the corporation, or on its property, rights, or liabilities) *epublic Planters
Ban+ v. Court of !ppeals, 213 S%RA 610 '1,,2-)
/he name of a corporation is very important, the incorporators constit.ting as body politic
and corporate .nder the name stated in the articles of incorporation for the period of time
mentioned therein) S.ch name is fatal in commercial transactions) /he p.blic may only 8now
the corporation thro.gh its name)
6+
/he name of a corporation is '1- essential to its eistence '2- it cannot change its name
ecept in the manner provided by the stat.te '1- by that name alone is it a.thori?ed to
transact b.siness and '*- it is thro.gh its name that a corporation can s.e and be s.ed and
perform all other legal acts)
S"% reserves the right to order a corporation to change name when it appears that there is an
identical name)
E.idelines on %orporate (ames;
1)- (ame m.st contain @%orp)A or @4nc)A
2)- (ame m.st not tend to mislead or conf.se the p.blic and m.st not contain s.ch
descriptive words as @ecellentA @fairA @goodA, etc)
1)- (ame m.st not be similar to a name already .sed by another partnership or corporation)
*)- 4f proposed name contains a word similar to a word already .sed as a part of the firm
name of a registered corporation, proposed name m.st contain two other words different
from the name of the company already registered)
+)- 4f name or s.rname .sed as part of corporate name, the incorporators m.st have a basis
for s.ch s.rname# it being one of the incorporators; Otherwise, consent of the person whose
name is being .sed m.st be s.bmitted)
3)- 4f it contains initials, it m.st contain an eplanation of the meaning and relevance or
reason thereof)
6)- /he .se of the words @StateA @9aharli8aA and @BaranggayA are prohibited and reserved for
the government)
/he following words when .sed m.st at least relate to the line of b.siness namely; Financing
and 4nvestment) /he following words are prohibited from being .sed namely; (ational,
"ngineer, Architect)
.5 P;($'3& C#);3& 'Secs) 1*'2- and *2# 6& Siuliong v. /irector of Commerce and 'ndustr&,
*2 $hil) +*1 K1,1,L-
Sec) *2 $ower to invest corporate f.nds in another corporation or b.siness or for any other
p.rpose > S.b:ect to the provisions of this %ode, a private corporation may invest its f.nds in
any other corporation or b.siness or for any other p.rpose other than the primary p.rpose for
which it was organi?ed when approved by a ma:ority of the board of directors or tr.stees and
ratified by the stoc8holders representing 2J1 of the o.tstanding capital stoc8 or at least 2J1 of
the members in case of non5stoc8 corporations, at a stoc8holdersN or members meeting d.ly
called for the p.rpose) <ritten notice of the proposed investment and the time and place of
the meeting shall be addressed to each stoc8holder or member at his place of residence as
shown on the boo8s of the corporation and deposited to the addresse in the post office with
postage prepaid, or served personally; $rovided; /hat any dissenting stoc8holder shall have
appraisal right as provided in this %ode; $rovided, however, /hat where the investment by the
corporation is reasonably necessary to accomplish its primary p.rpose as stated in the
articles of incorporation, the approval of the stoc8holders or members shall not be necessary)
@/he best proof of the p.rpose of a corporation is its articles of incorporation and by5
laws) /he articles of incorporation m.st state the primary and secondary p.rposes of
the corporation, while the by5laws o.tline the administrative organi?ation of the
corporation, which, in t.rn, is s.pposed to ins.re or facilitate the accomplishment of
said p.rpose)A /herefore, the %o.rt br.shed aside the contention that the corporations
were organi?ed to illegally avoid the provisions on land reform and to avoid the
payment of estate taes, as being prohibited collateral attac8) -ala v. "llice !gro<
'ndustrial Corp., *10 S%RA *11 '2221-)
Significance; 4t confers as well as limits the powers which a corporation may eercise) Other
reasons; '1- prospective investors shall 8now the 8ind of b.siness the corporation deals with
'2- management shall 8now the limits of its action '1- a third party can 8now whether his
dealing with the corporation is within the corporate f.nctions and powers '*- also, for the
Revised Bagtas Reviewer by Ve and Ocfe 2A
administrative s.pervision and monitoring of the State, to determine which partic.lar agency
shall have :.risdiction over the operations of the corporation)
/he p.rpose m.st be lawf.l, having only one primary p.rpose and many secondary p.rposes)
-5 C'($'()t& T&(/ 'Sec) 11-
Sec) 11 %orporate /erm > A corporation shall eist for a period not eceeding fifty years '+2-
from the date of incorporation .nless sooner dissolved or .nless said period is etended) /he
corporate term as originally stated in the articles of incorporation may be etended for
periods not eceeding fifty years '+2- in any single instance by an amendment of the articles
of incorporation in accordance with this %ode# $rovided, that no etension can be made
earlier than five years '+- prior to the original or s.bse7.ent epiry dates .nless there are
:.stifiable reasons for an earlier etension as may be determined by the S"%)
/he p.rpose of the limit emphasi?es the contract.al nat.re of the corporation > the etension
m.st be approved by the State)
(o etension of term can be effected once dissol.tion stage has been reached, as it
constit.tes new b.siness) !lhambra Cigar v. S"C, 2* S%RA 23, '1,30-)
&5 P("%."$)# P#).& ', B;3"%&33 'Sec) +1-
Sec) +1 $lace and time of meetings of stoc8holders or members > Stoc8holdersN or membersN
meetings, whether reg.lar or special, shall be held in the city or m.nicipality where the
principal office of the corporation is located and if practicable in the principal office of the
corporation; $rovided, /hat 9etro 9anila shall, for p.rposes of this section, be considered a
city or m.nicipality)
(otice of meetings shall be in writing, and the time and place thereof stated therein)
All proceedings had and any b.siness transacted at any meeting of the stoc8holders or
members, if within the powers or a.thority of the corporation shall be valid even if the
meeting be improperly held or called, provided all the stoc8holders or members of the
corporation are present or d.ly represented at the meeting)
49$OR/A(%"; For :.risdictional p.rposes) /he corporation cannot be allowed to file an action
in a place other than that place or in the place of residence of the defendant)
$lace of residence of the corporation is the place of its principal office) Clavecilla *adio
S&stem v. !ntillon, 1, S%RA 16, '1,36-
/he residence of its president is not the residence of the corporation beca.se a
corporation has a personality separate and distinct from that of its officers and
stoc8holders) S& v. %&son "nterprises, 'nc., 11, S%RA 136 '1,02-)
,5 M"%"/;/ C)$"t)#">)t"'% 'Sec) 12-
Sec) 12 9inim.m capital stoc8 re7.ired of stoc8 corporation > Stoc8 corporations incorporated
.nder this %ode shall not be re7.ired to have any minim.m a.thori?ed capital stoc8 ecept as
otherwise specifically provided for by special law, and s.b:ect to the provisions of the
following section)
Sec) 11 Amo.nt of capital stoc8 to be s.bscribed and paid for the p.rposes of incorporation >
At least twenty5five percent '2+R- of the a.thori?ed capital stoc8 as stated in the articles of
incorporation m.st be s.bscribed at the time of incorporation and at least twenty5five percent
'2+R- of the total s.bscription m.st be paid .pon s.bscription, the balance to be payable on
a date or dates fied in the contract of s.bscription witho.t need of call, or in the absence of
a fied date or dates, .pon call for payment by the Board of Girectors; $rovided however, that
in no case shall the paid5.p capital be less than five tho.sand pesos '$+,222-)
C; Goes the %orp) %ode epressly provide for a minim.m re7.irement of the a.thori?ed
capital stoc8D
A; Under Sec) 12 there is no minim.m re7.irement b.t the %ode says that @in no case shall
the paid .p capital be less than $+,222 'Sec) 11-) /h.s it t.rns o.t that $+,222 is the
minim.m)
66
C; <hy is the maim.m capitali?ation re7.ired to be indicatedD
A; '1- /o protect the stoc8holders and also it limits the iss.ance of capital stoc8 and the
etent of the voting power or capacity of a stoc8holder '2- Beca.se of acco.ntability) <hether
a corporation is going to do good or bad will depend .pon the assets its holds) /he only way
by which the State can loo8 at the acco.ntability of a corporation in terms of assets it
receives is to get a maim.m so that if the corporation wants to go beyond that, it has to go
bac8 to the State)
95 S;73.("$t"'% )%- P)"--;$ R&B;"(&/&%t3 'Sec) 11-
Sec) 11 Amo.nt of capital stoc8 to be s.bscribed and paid for the p.rposes of incorporation >
At least twenty5five percent '2+R- of the a.thori?ed capital stoc8 as stated in the articles of
incorporation m.st be s.bscribed at the time of incorporation and at least twenty5five percent
'2+R- of the total s.bscription m.st be paid .pon s.bscription, the balance to be payable on
a date or dates fied in the contract of s.bscription witho.t need of call, or in the absence of
a fied date or dates, .pon call for payment by the Board of Girectors; $rovided however, that
in no case shall the paid5.p capital be less than five tho.sand pesos '$+,222-)
C; <hat is the 2+R52+R r.leD
A; 4t means that of the a.thori?ed capital stoc8 applied for, 2+R thereof m.st be s.bscribed)
Of the 2+R s.bscribed thereof m.st be paid .p) "ample, a corporation is by + individ.als
and they as8 for an a.thori?ed capital stoc8 of $29, how m.ch m.st each s.bscribe toD
$12+,222) RA/4O(A&"; /he p.rpose of s.ch a re7.isition is that the State may be ass.red of
the s.ccessf.l prosec.tion of the wor8 and that creditors of the company may have to the
etent, at least, of the re7.ired s.bscription, the means of obtaining satisfaction for their
claims)
C; 9.st each s.bscribe e7.allyD
A; (o)
(O/"S;
1)- %apital Stoc8 > the amo.nt fied in the A4 proc.red to be s.bscribed and paid .p) 4t is
settled that shares iss.ed in ecess of the a.thori?ed capital stoc8 are void)
2)- %apital > the act.al property or estate of the corporation whether in money or property) 4t
may be higher or lower than the capital stoc8)
1)- S.bscribed %apital Stoc8 > the portion of the capital stoc8 s.bscribed 'proc.red to be paid-
whether or not f.lly paid)
*)- S.bscription > the m.t.al agreement of the corporation and the s.bscriber to ta8e and pay
for the stoc8 of the corporation)
+)- $re5incorporation > the stage in which each incorporator or stoc8holder agrees to
contrib.te to a proposed corporation)
3)- $ar val.e share > one in the certificate of stoc8 of which appears an amo.nt in pesos as
the nominal val.e of shares# m.st be stated in the A4 and par val.e share cannot be iss.ed at
less than s.ch par val.e, which may only be changed by amendment)
6)- (o par val.e share > stated in the A4 that it wo.ld be iss.ed by the corporation and its
consideration cannot be less than the iss.ed val.e, which cannot be less than five pesos '$+-)
Val.e may be fied in any of the three ways; '1- by the articles of incorporation '2- by the
board of directors when so a.thori?ed by said articles or by the by5laws '1- by the
stoc8holders representing at least a ma:ority of the controlling stoc8holders)
!5 St&$3 )%- D'.;/&%t3 R&B;"(&- "% SEC
4n addition to the A4, doc.ments re7.ired are;
1)- /reas.rerNs Affidavit > accompanied by a sworn statement of the /reas.rer that at
least 2+R of the capital stoc8 a.thori?ed is s.bscribed and at least 2+R of s.ch have
been f.lly paid in cash or property > fair val.ation of which is e7.al at least to 2+R of
the said s.bscription, s.ch paid5.p capital not being less than $+,222)
Revised Bagtas Reviewer by Ve and Ocfe 2A
2)- %ertificate of deposit
1)- &etter of a.thority for the S"% a.thori?ing it to eamine the ban8 deposit, boo8s of
acco.nt and s.pporting records as to the eistence and .tili?ation of the paid5.p
capital stoc8
*)- <ritten .nderta8ing to change their partnership or corporate name in case there is
another person, firm, entity wit a prior right to .se of the said income or one similar to
it)
. G(';%-3 ,'( D"3)$$('1)# 'Sec) 16-
Sec) 16 Ero.nds when articles of incorporation or amendment may be re:ected or
disapproved > /he S"% may re:ect the articles of incorporation or disapprove any amendment
thereto if the same is not in compliance with the re7.irements of this %ode; $rovided, that the
%ommission shall give the incorporators a reasonable time within which to correct or modify
the ob:ectionable portions of the articles or amendment) /he following are gro.nds for s.ch
re:ection or approvalA
1)- /hat the articles of incorporation or any amendment thereto is not s.bstantially in
accordance with the form prescribed herein#
2)- /hat the p.rpose or p.rposes of the corporation are patently .nconstit.tional, illegal,
immoral or contrary to government r.les and reg.lations#
1)- /hat the /reas.rerNs Affidavit concerning the amo.nt of capital stoc8 s.bscribed andJor
paid is false)
*)- /hat the percentage of ownership of the capital stoc8 to be owned by the citi?ens of the
$hilippines has not been complied with as re7.ired by eisting laws or the %onstit.tion)
(o articles of incorporation or amendment to articles of incorporation of ban8s, ban8ing and
7.asi5ban8ing instit.tions, b.ilding and loan associations, tr.st companies and other financial
intermediaries, ins.rance companies, p.blic .tilities, ed.cational instit.tions and other
corporations governed by special laws shall be accepted or approved by the %ommission
.nless accompanied by a favorable recommendation of the appropriate government agency
to the effect that s.ch articles or amendment is in accordance with law)
<hen the proposed articles show that the ob:ect is to organi?e a barrio into a separate
corporation for the p.rpose of ta8ing possession and having control of all m.nicipal property
within the incorporated barrio and administer it ecl.sively for the benefit of the residents,
the ob:ect is .nlawf.l and the articles can be denied registration) !suncion v. /e @riarte, 20
$hil) 36 '1,1*-)
4t is well to note that, if a corporationNs p.rpose, as stated in the Articles of 4ncorporation,
is lawf.l, then the S"% has no a.thority to in7.ire whether the corporation has p.rposes other
than those stated, and mandam.s will lie to compel it to iss.e the certificate of
incorporation)A -ala v. "llice !gro<'ndustrial Corp., *10 S%RA *11 '2221-)
S"%Ns d.ty is not merely ministerial > 4t has been granted by $G ,225A the powers to eamine
and approve or disapprove the articles of incorporation and registration of a corporation)
4. A/&%-/&%t3 t' t!& A(t".#&3 ', I%.'($'()t"'% 'Sec) 13-)
Sec) 13 Amendment of Articles of 4ncorporation > Unless otherwise prescribed by this %ode or
by special law and for legitimate p.rposes, any provision or matter stated in the articles of
incorporation may be amended by a ma:ority vote of the board of directors or tr.stees and
the vote or written assent of the stoc8holders representing at least 2J1 of the o.tstanding
capital stoc8, witho.t pre:.dice to the appraisal right of dissenting stoc8holders in accordance
with the provisions of this %ode, or the vote or written assent of at least 2J1 of the members if
it be a non5stoc8 corporation)
6,
/he original and amended articles together shall contain all provisions re7.ired by law to set
o.t in the articles of incorporation) S.ch articles, as amended shall be indicated by
.nderscoring the change or changes made, and a copy thereof d.ly certified .nder oath by
the corporate secretary and a ma:ority of the directors or tr.stees stating the fact that said
amendment or amendments have been d.ly approved by the re7.ired vote of the
stoc8holders or members shall be s.bmitted to the S"%)
/he amendments shall ta8e effect .pon their approval by the S"% or from the date of the
filing with the said %ommission if not acted .pon within si '3- months from the date of filing
for a ca.se not attrib.table to the corporation)
(O/"S; /he matter to be amended, even if it does not concern the Board, m.st always be
conc.rred with by the Board) 9ore importantly, the impet.s to amend m.st always come
from the Board) /he stoc8holders merely ratify s.ch amendment) S.ch is the case beca.se
the Board constit.tes the centrali?ed management) /he impet.s of the Board comprises the
obligatory force of the contracts entered into)
2J1 votes are needed in A4 while a ma:ority is needed in amending by laws S.ch is the case
to ma8e it easier to amend by5laws)
5. C'//&%.&/&%t ', C'($'()t& E2"3t&%.& 'Sec) 1,-)
Sec) 1, %ommencement of corporate eistence > A private corporation formed or organi?ed
.nder this %ode commences to have corporate eistence and :.ridical personality and is deemed
incorporated from the date the S"% iss.es a certificate of incorporation .nder its official seal and
there.pon the incorporators, stoc8holdersJmembers and their s.ccessors shall constit.te a body
politic and corporate .nder the name stated in the articles of incorporation for the period of time
mentioned therein, .nless said period is etended or the corporation is sooner dissolved in
accordance with law)
Eo8ongwei vs) S"%
Revised Bagtas Reviewer by Ve and Ocfe 2A
VIII. BY-LAWS
See relevant portions of V4&&A(U"VA, !Corporate Contract Law,! 10 A/"("O &)=) 1 '(o) 2,
=.ne 1,,*-)
. N)t;(& )%- 6;%.t"'%3 'a-o+ongwei v. S"C, 0, S%RA 116 K1,6,L# aPeCa v. C!, 1,1 S%RA
616 K1,,1L-
FA%/S;
4n 1,62, Universal Robina %orp ac7.ired 322,,06 share in San 9ig.el %orp) 4n 1,62 also,
%onsolidated Foods %orp) ac7.ired S9% shares amo.nting to $+*1,,+,) =ohn Eo8ongwei, the
presidne tand controlling stoc8holder of UR% I %F% p.rchased +,222 S9% shares) Eo8ongwei tried
to get a seat in the S9% BoG b.t was re:ected by the SMNs n the gro.nds that he was engaged in a
competitive b.siness and his sec.ring a seat in the BoG wo.ld s.b:ect S9% to great disadvantages)
On September 10, 1,63 repondent SMNs amended the by5laws of S9%, Eo8ongwei contends
that;
1) the BoG acted witho.t a.thority I in .s.rpation of the power of the SMNs since the
comp.tation of 2J1 vote was based on the a.thori?ed capital stoc8 as of 1,31 I not as of
1,63
2) /he a.thority granted in 1,31 was also etended in 1,32 I 1,31 when said a.thority was
s.pposed to cease to eist
1) $rior to said amendment, petitioner had all the 7.alifications as Girector I that as a
s.bstit.te SM he has the right to vote I be voted as director I that in amending the by5
laws, the corp) p.rposely provided for Eo8ongweiNs dis7.alificationI deprived him of his
vested right)
*) Eo8ongwei f.rther alleges that the corp) has no inherent power to dis7.alify a SM I that
provision allowing the BoG to consider s.ch factors as b.siness I family relations is
01
.nreasonable I oppressive, th.s void)
Eo8ongwei prays that the amended by laws be declared n.ll I void) Me also wanted to
inspect and get a copy of certain doc.ments pertaining to the corp) /he S"% allowed him to see the
min.tes of the meeting only) So he filed an 9R I a petition with the S% d.e to the alleged deliberate
inability of the S%" to action on his petition)
/he S"% had earlier r.led in denying the 9R, allowing Eo8ongwei to r.n as director b.t he
sho.ld not sit as s.ch if elected .ntil there is a decision on the validity of the by5laws)
/he S9% answered by saying that he is engaged in a b.siness antagonistic to S9% I that in
allowing him to sit in the BoG, he wo.ld have access to S9% trade secrets and plans) 4t says that the
amended by laws were adopted to preserve I protect S9% from danger which was based in its right
for self5preservation)
4SSU"; <hether or not the amended by5laws of S9% dis7.alifying a competitor from nomination or
election to the BoG of S9% are valid and reasonableD
M"&G;
1) "very corp) has the inherent right to adopt by5laws for its internal government I to
reg.late the cond.ct I prescribe the rights and d.ties of its members towards itself I
among themselves in reference to the management of its affairs) /his is epressly
recogni?ed by Sec) 21 of the %orp) %ode I has been en.nciated in EovNt vs) "l Mogar)
2) Any person who b.ys stoc8s in a corp) does so with the 8nowledge that its affairs are
dominated by a ma:ority of the stoc8holders I that he impliedly contracts that the will of
the ma:ority shall govern in all matters within the limits of the Ao4 I By5laws) A
stoc8holder is said to have parted with his right to reg.late the disposition of his property
which he invested in the corporation) /h.s, no contract between the SMs and corp) was
infringed)
1) $.rs.ant to Sec) 10 of the %orp) &aw, any corp) may amend its Ao4 by a vote or written
assent of the ShNs representing at least t 2J1 of the s.bscribed capital stoc8) 4f it changes,
diminishes or restricts the rights of SMs, the dissenting minority has only the right to
ob:ect in writing I demand payment of their share) $etitioner has no vested right to be
elected director)
*) A director stands in a fid.ciary relation to the corp) I its SMs) Me has control I g.idance
of corporate affairs I property I hence, of the property interests of SMs) "7.ity
recogni?es that SMs are properties of corporate interest I are .ltimately the only
beneficiaries thereof) /h.s, he cannot serve 2 adverse masters witho.t detriment to one
of them Me cannot .tili?e his inside information I strategic position to his own
preferment)
+) An amendment to the by5laws which renders a SM ineligible to be a director, if he be also a
director in a competitor corp) has been s.stained valid) /his is based on the principle that
where the director is employed in the service of a rival corp he cannot serve both b.t
m.st betray one or the other) S.ch an enactment merely advances the benefit of the corp
I for its own good) %orporate officers are not permitted to .se their position of tr.st I
confidence to f.rther their private interests)
3) GO%/R4(" OF %OR$ORA/" O$OR/U(4/H > rests on the .nfairness of an officer or director
ta8ing advantage of an opport.nity for his own personal profit where the interest of the
corporation calls for protection) Mere BoG members have access to mar8eting strategies,
pricing str.ct.re, b.dget for epansion, RIG so.rces of f.nding, availability of personnel,
mergers I tie5.ps, etc) /he 7.estioned amendment of the y5laws was done to prevent the
creation or an oppositor for an officer or director of S9%, also an officer of a competing
corp) from ta8ing advantage of the information which he as director to promote his
individ.al corporate interests to the detriment of S9%, it wo.ld be hard to avoid any
possibility of Eo8ongweiNs ta8ing advantage of his position as S9% director)
6) /he S% grants the petition regarding Eo8ongweiNs petition to eamine the boo8 and
records of S9%
$eDa vs) %A
Revised Bagtas Reviewer by Ve and Ocfe 2A
0) Mowever, it s.stained the validity of the amendment to the by5laws witho.t pre:.dice to
the 7.estion of act.al dis7.alification of Eo8ongwei to r.n if elected to sit as S9% director
being decided, after proper hearing by the S9% BoG, whose decisions shall be appealable
to the S"% I to the S%, .nless dis7.alified, the prohibiton in the said by5laws will not apply
to Eo8ongwei)
FA%/S;
$A9BUS%O original owners of the lots in 7.estion, mortgaged the same to GB$ in
consideration of $,1+,222) /his mortgage was foreclosed and said properties were awarded to
Rosita $e[a as highest bidder in the foreclos.re sale) /he Board of $A9BUS%O, thro.gh three of its
members resolved to assign its to one of its members, Atty) =oa7.in Briones, to eec.te and sign a
deed of assignment for and in behalf of $A9BUS%O in favor of any interested party) /h.s, Briones
eec.ted a deed of Assignment of $A9BUS%ONs redemption right over the s.b:ect lots in favor of
9arelino "nri7.e?) /he latter then redeemed the said properties and a certificate of redemption
dated A.g) 1+, 1,6+ was iss.ed) "nri7.e? eec.ted a deed of absol.te sale of the s.b:ect properties
in favor of plaintiff5appellants, the spo.ses Rising /) Hap and %atalina &.g.e)
$e[a wrote the sheriff notifying him that the redemption was not valid as it was made .nder a
void deed of assignment) She then re7.ested the recall of the said redemption and a restraint on
any registration or transaction regarding the lots) Gefendant $e[a thro.gh co.nsel wrote the sheriff
as8ing for eec.tion of a deed of final sale in her favor on the gro.nd that the one year period of
redemption has long elapsed witho.t any valid redemption having been eercised) $laintiff Hap
wrote defendant $e[a as8ing for payment for bac8 rentals in the amo.nt of $*2,6+2)22 for the .se
and occ.pancy of the land and ho.se) &ater, the spo.ses Hap were prompted to file the instant case
on the gro.nd that being registered owners, they have the right to enforce their right to possession
against defendant who has been allegedly in .nlawf.l possession thereof)
4t was contended that plaintiffs co.ld not have ac7.ired ownership over the s.b:ect properties
.nder a deed of absol.te sale eec.ted in their favor by one 9arcelino "nri7.e? who li8ewise co.ld
not have become the owner of the properties in 7.estion by redeeming the same .nder a void deed
of assignment) /he defense was that since the deed of assignment eec.ted by $A9BUS%O in favor
of "nri7.e? was void ab initio for being an .ltra vires act of its board of directors and for being
witho.t any val.able consideration, it co.ld not have had any legal effect) /% fo.nd for petitioner)
%A reversed)
M"&G;
4n order that the S"% can ta8e cogni?ance of a case, the controversy m.st pertain to any of
the following relationships;
a) between corp), partnership or assoc) and the p.blic
b) between the corp) and its SM, members, officers
c) between corp) and the state in so far as its franchise, permit or license to operate is
concerned
d) among the stoc8holders, partners or associates themselves)
(either petitioner nor respondents Hap spo.ses are stoc8holders or officers of $A9BUS%O)
%onse7.ently, the iss.e of the validity of the series of transactions may be resolved only by
the reg.lar co.rts)
/he by5laws of a corporation are its own private laws which s.bstantially have the same
effect as the laws of the corporation) /hey are in effect written into the charter) 4n this sense,
they become art of the f.ndamental law of the corporation which the corporation and its
directors and officers m.st comply with) Only three o.t of five directors of $A9BUS%O
convened on (ovember 1,, 1,6* by virt.e of a prior notice of a special meeting) /here was
no 7.or.m to validly transact b.siness since, .nder Section * of the amended by5laws herein
above reprod.ced, at least * members m.st be present to constit.te a 7.or.m in a special
meeting of the BoG) /he Ao4 or by5laws of the corp) may fi a greater n.mber than the
01
ma:ority than the ma:ority of the n.mber of board members to constit.te the 7.or.m
necessary for the valid transaction f b.siness) Being a dormant corp) for several years, it was
highly irreg.lar, if not anomalo.s, for a gro.p of three individ.als representing themselves to
be the directors of respondent $A9BUS%O to pass a resol.tion disposing of the only
remaining asset of the corporation in favor of a former corporate officer) /he latest list of SM
of respondent $A9BUS%O on file with the S"% does not show that the said alleged directors
were among the SMs of respondent $A9BUS%O) Since the disposition of said redemption right
of $A9BUS%O by virt.e of the 7.estions ed resol.tion was not approved by the re7.ired
n.mber of SMs .nder the law, the said resol.tion, as well as the s.bse7.ent assignment
eec.ted assigning to respondent "nri7.e? the said right of redemption sho.ld be str.c8
down as n.ll and void)
As the @r.les and reg.lations or private laws enacted by the corporation to reg.late,
govern and control its own actions, affairs and concerns and its stoc8holders or members and
directors and officers with relation thereto and among themselves in their relation to it,A by5
laws are indispensable to corporations) /hese may not be essential to corporate birth b.t
certainly, these are re7.ired by law for an orderly governance and management of
corporations) Lo&ola -rand 1illas Homeowners v. C!, 263 S%RA 301 '1,,6-)
C) Gisting.ish by5laws from Ao4
A) /he Ao4 is not an internal doc.ment that binds the parties to a corporate setting) 4t is also a
doc.ment that binds the State) /he B& is an intram.ral doc.ment, its s.pposed to bind the inner
wor8ings of a corp)
C) Are the Ao4 and B& p.blic doc.mentsD
A) Hes, both are p.blic doc.ments beca.se they are not valid and binding witho.t the approval of
the S"%
C) Goes the B& have to be approved by the S"%D
A) Hes, prior to the approval of the S"%, the by5laws are not binding since the code epressly
re7.ires the approval of the S"% to be binding .pon the SMs and members) Absent the codal
provision, it is binding beca.se of a corp)Ns inherent power to adopt its own by5laws)
C) Go B& bind the p.blicD
A) As a general r.le, B& provisions do not bind the p.blic, ecept if the third person has 8nowledge
of the B& provision)
4)5 Common !a( !imitations on 0'5!a(s
4"5 By-L)*3 C)%%'t B& C'%t()(y t' L)* )%- C!)(t&(
A by5law provision granting to a stoc8holder permanent seat in the Board of
Girectors is contrary to the provision in %orporation %ode re7.iring all members of the
Board to be elected by the stoc8holders) "ven when the members of the association
may have formally adopted the provision, their action wo.ld be of no avail beca.se no
provision of the by5laws can be adopted if it is contrary to law) -race Christian High
School v. Court of !ppeals, 201 S%RA 111 '1,,6-)
4""5 By-L)* P('1"3"'%3 C)%%'t B& U%(&)3'%)7#& '( B& C'%t()(y t' t!& N)t;(& ',
By-#)*3. -overnment of P.'. v. "l Hogar ,ilipino, +2 $hil) 1,, '1,26-)
A.thority granted to a corporation to reg.late the transfer of its stoc8 does not
empower the corporation to restrict the right of a stoc8holder to transfer his shares,
b.t merely a.thori?es the adoption of reg.lations as to the formalities and proced.re
to be followed in effecting transfer) %homson v. Court of !ppeals, 2,0 S%RA 202
%hina Ban8ing %orp) v) %o.rt of Appeals, 262 S%RA +21 '1,,6-)
Revised Bagtas Reviewer by Ve and Ocfe 2A
'1,,0-)
By5laws are intended merely for the protection of the corporation, and prescribe
reg.lation, not restriction# they are always s.b:ect to the charter of the corporation)
*ural Ban+ of Salinas, 'nc. v. C!, 212 S%RA +12 '1,,2-)
4"""5 By-L)* $('1"3"'%3 .)%%'t -"3.("/"%)t&
475 0indin+ Effects on 0'5la(s1 aChina Ban+ing Corp. v. Court of !ppeals, 262 S%RA +21
'1,,6-)
FA%/S;
%alapatia, a stoc8holder of $R Valley Eolf and %o.ntry %l.b pledged his Stoc8 %ertificate
to petitioner %hina Ban8ing) $etitioner wrote VE%%4 re7.esting that the aforementioned
pledge agreement be recorded in its boo8s) &ater, %alapatia obtained a loan of $22,222 from
petitioner, payment of which was sec.red by the aforestated pledge agreement still eisting
between %alapatia and petitioner) G.e to %alapatiaNs fail.re to pay his obligation, petitioner
filed a petition for etra5:.dicial foreclos.re) $etitioner informed VE%%4 of the above5
mentioned foreclos.re proceedings and re7.ested that the pledged stoc8 be transferred to its
name) Mowever, VE%%4 wrote petitioner epressing its inability to accede to petitionerNs
re7.est d.e to %alapatiaNs .nsettled acco.nts with the cl.b)
Gespite the foregoing, (otary $.blic de Vera held a p.blic a.ction and petitioner emerged as
the highest bidder, VE%%4 sent %alapatia a notice demanding f.ll payment of his overd.e acco.nt in
the amo.nt of $10,601)2*) VE%%4 ca.sed to be p.blished in the newspaper Gaily "press a notice of
a.ction sale by VE%%4 of its s.b:ect share of stoc8 and thereafter filed a case with the R/% of 9a8ati
for the n.llification) /he R/% dismissed the case for lac8 of :.risdiction over the s.b:ect matter on
the theory that it involves an intra5corporate disp.te)
$etitioner filed a complaint with the S"%) /he %ommission en banc believed that appellant5
petitioner had a prior right over the pledged share and beca.se of pledgorNs fail.re to pay the
principal debt .pon mat.rity, appellant5petitioner co.ld proceed with the foreclos.re sale of the
pledged share) /he a.ction sale cond.cted by appellee5respondent %l.b was declared n.ll and void)
/he %A rendered its decision n.llifying and setting aside the orders of the S"% and its hearing
officers on the gro.nd of lac8 of :.risdiction over the s.b:ect) /he %A declared that the controversy
between %B% and VE%%4 is not intra5corporate)
M"&G;
VE%%4 claims a prior right over the s.b:ect share anchored mainly on Sec) 1, Art) V444 of its by5
laws which provides that after a member shall have been posted as delin7.ent, the Board may order
hisJherJits share sold to satisfy the claims of the cl.b) 4t is p.rs.ant to this provision that VE%%4 also
sold the s.b:ect share at p.blic a.ction, of which it was the highest bidder) VE%%4 caps its arg.ment
by asserting that its corporate by5laws co.ld prevail) /he S"% therefore too8 proper cogni?ance of
the instant case)
9oreover, VE%%4 completely disregarded petitionerNs right as pledgee) 4t even failed to give
petitioner notice of said a.ction sale) S.ch act.ations of VE%%4 th.s belie its claim of good faith) 4n
defending its actions, VE%%4 li8ewise maintains that petitioner is bo.nd by its by5laws) 4t arg.es that
the E)R) is that third persons are not bo.nd by the by5laws of a corporation since they are not privy
to thereto) /he eception to this is when 1
rd
persons have act.al or constr.ctive 8nowledge of the
same) 4n the case at bar, petitioner had act.al 8nowledge of the by5laws of private respondent when
petitioner foreclosed the pledge made by %alapatia and when petitioner p.rchased the share
foreclosed) /h.s, the petitioner p.rchased the said share s.b:ect to the right of the $R to sell the
said shares for reasons of delin7.ency and the right of $R to have a first lien on said shares as these
rights are provided for in the by5laws very clearly)
4n order to be bo.nd, the 1
rd
party m.st have ac7.ired 8nowledge of the pertinent by5laws at
the time the transaction or agreement between said 1
rd
party and the shareholder was entered into,
in this case, at the time the pledge agreement was eec.ted) $etitionerNs belated notice of said by5
laws at the time of the foreclos.re will not s.ffice) By5laws signify the r.les and reg.lations of
0+
private laws enacted by the corporation to reg.late, govern and control its own actions, affairs and
concerns and its stoc8holders or members and directors and officers with relation thereto and among
themselves in their relation to it) /he p.rpose of a by5law is to reg.late the cond.ct and define the
d.ties of the members towards the corporation and among themselves)
(ote; Onowledge of the by5laws m.st be present at the time of the perfection of the contract) S.ch is
not the case here, 8nowledge of the by5laws was had only d.ring the proceedings, as s.ch, it cannot
bind %hina Ban8) Mowever, one may arg.e in the same way in &and /itles, where ban8s are re7.ired
to go beyond the face of the title as they are instit.tions endowed with p.blic interest# in this case
%hina Ban8 sho.ld have in7.ired into s.ch by5laws before entering into the transactions mentioned)
@(either can we concede that s.ch contract wo.ld be invalid :.st beca.se the
signatory thereon was not the %hairman of the Board which allegedly violated the
corporationNs by5laws) Since by5laws operate merely as internal r.les among the
stoc8holders, they cannot affect or pre:.dice third persons who deal with the
corporation, .nless they have 8nowledge of the same)A aPM' Colleges v. L*C, 266
S%RA *32 '1,,6-)
$94 %O&&"E"S v) (&R%
FA%/S;
$94 is an ed.cational instit.tion offering co.rses on basic seaman training and other marine5
related co.rses hired private respondent as contract.al instr.ctor with an agreement that the latter
shall be paid at an ho.rly rte of $12 t $+2) $R then organi?ed classes in marine engineering) $R and
other instr.ctors were compensated for services rendered d.ring the first three periods of the above5
mentioned contract) Mowever, for reasons .n8nown to $R, he stopped receiving payment for the
s.cceeding rendition of services)
Repeated demands having li8ewise failed, $R was soon constrained to file a complaint
see8ing payment for salaries earned) $94 contended that classes in the co.rses offered which
complainant claimed to have remained .npaid were not held in the school premises of $94) Only $R
8new whether classes were indeed cond.cted) &ater in the proceedings, petitioner manifested that
9r) /omas %loma =r), a member of the petitioners BoG wrote a letter to the %hairman of the Board
clarifying the case of $R and stating therein that .nder $94Ns by5laws, only the %hairman is
a.thori?ed to sign any employment contract) A decision was rendered by the &abor Arbiter finding
for $R) /he (&R% affirmed)
M"&G;
/he contract wo.ld be invalid :.st beca.se the signatory was not the chairman which
allegedly violated $94 by5laws b.t since by5laws operate merely as internal r.les among the stoc8
holders, they cannot affect or pre:.dice 1
rd
persons who deal with the corporation in good faith .nless
they have 8nowledge of the same) (o proof appears on record that $R ever 8new anything abo.t the
provisions of said by5laws) $etitioner itself merely asserts the same witho.t even bothering to attach
a copy or ecerpt thereof to show that there is s.ch a provision) /hat this allegation has never been
denied by $R does not necessarily signify admission)
2. A-'$t"'% P('.&-;(& 'Sec) *3-
Section *3) Adoption of by5laws) 5 "very corporation formed .nder this
%ode m.st, within one '1- month after receipt of official notice of the
iss.ance of its certificate of incorporation by the Sec.rities and
"change %ommission, adopt a code of by5laws for its government not
inconsistent with this %ode) For the adoption of by5laws by the
corporation the affirmative vote of the stoc8holders representing at
least a ma:ority of the o.tstanding capital stoc8, or of at least a
ma:ority of the members in case of non5stoc8 corporations, shall be
necessary) /he by5laws shall be signed by the stoc8holders or
members voting for them and shall be 8ept in the principal office of the
Revised Bagtas Reviewer by Ve and Ocfe 2A
corporation, s.b:ect to the inspection of the stoc8holders or members
d.ring office ho.rs) A copy thereof, d.ly certified to by a ma:ority of
the directors or tr.stees co.ntersigned by the secretary of the
corporation, shall be filed with the Sec.rities and "change
%ommission which shall be attached to the original articles of
incorporation)
(otwithstanding the provisions of the preceding paragraph, by5laws
may be adopted and filed prior to incorporation# in s.ch case, s.ch by5
laws shall be approved and signed by all the incorporators and
s.bmitted to the Sec.rities and "change %ommission, together with
the articles of incorporation)
4n all cases, by5laws shall be effective only .pon the iss.ance by the
Sec.rities and "change %ommission of a certification that the by5laws
are not inconsistent with this %ode)
The Securities and Exchange Commission shall not accept for filing the by-laws or any amendment thereto of any
bank, banking institution, building and loan association, trust company, insurance company, public utility, educational
institution or other special corporations governed by special laws, unless accompanied by a certificate of the
appropriate government agency to the effect that such by-laws or amendments are in accordance with law. !"a#
/here can be no automatic dissolution simply beca.se the incorporators failed to file the
re7.ired by5laws .nder Sec) *3 of %orporation %ode) /here is no o.tright @demiseA of
corporate eistence) $roper notice and hearing are cardinal components of d.e process in any
democratic instit.tion, agency or society) 4n other words, the incorporators m.st be given the
chance to eplain their neglect or omission and remedy the same)A Lo&ola -rand 1illas
Homeowners v. C!, 263 S%RA 301 '1,,6-)
0. C'%t&%t3 'Sec) *6-
Section *6) %ontents of by5laws. 5 S.b:ect to the provisions of the
%onstit.tion, this %ode, other special laws, and the articles of
incorporation, a private corporation may provide in its by5laws for;
1) /he time, place and manner of calling and cond.cting reg.lar or
special meetings of the directors or tr.stees#
2) /he time and manner of calling and cond.cting reg.lar or special
meetings of the stoc8holders or members#
1) /he re7.ired 7.or.m in meetings of stoc8holders or members and
the manner of voting therein#
*) /he form for proies of stoc8holders and members and the manner
of voting them#
+) /he 7.alifications, d.ties and compensation of directors or tr.stees,
officers and employees#
3) /he time for holding the ann.al election of directors of tr.stees and
the mode or manner of giving notice thereof#
6) /he manner of election or appointment and the term of office of all
officers other than directors or tr.stees#
0) /he penalties for violation of the by5laws#
,) 4n the case of stoc8 corporations, the manner of iss.ing stoc8
certificates# and
12) S.ch other matters as may be necessary for the proper or
convenient transaction of its corporate b.siness and affairs) '21a-
06
4. A/&%-/&%t3 'Sec) *0-
- $ower to amend may be delegated to the BoG
Section *0) Amendments to by5laws. 5 /he board of directors or
tr.stees, by a ma:ority vote thereof, and the owners of at least a
ma:ority of the o.tstanding capital stoc8, or at least a ma:ority of the
members of a non5stoc8 corporation, at a reg.lar or special meeting
d.ly called for the p.rpose, may amend or repeal any by5laws or adopt
new by5laws) /he owners of two5thirds '2J1- of the o.tstanding capital
stoc8 or two5thirds '2J1- of the members in a non5stoc8 corporation
may delegate to the board of directors or tr.stees the power to amend
or repeal any by5laws or adopt new by5laws; $rovided, /hat any power
delegated to the board of directors or tr.stees to amend or repeal any
by5laws or adopt new by5laws shall be considered as revo8ed whenever
stoc8holders owning or representing a ma:ority of the o.tstanding
capital stoc8 or a ma:ority of the members in non5stoc8 corporations,
shall so vote at a reg.lar or special meeting)
<henever any amendment or new by5laws are adopted, s.ch
amendment or new by5laws shall be attached to the original by5laws in
the office of the corporation, and a copy thereof, d.ly certified .nder
oath by the corporate secretary and a ma:ority of the directors or
tr.stees, shall be filed with the Sec.rities and "change %ommission
the same to be attached to the original articles of incorporation and
original by5laws)
/he amended or new by5laws shall only be effective .pon the iss.ance by the
Sec.rities and "change %ommission of a certification that the same are not
inconsistent with this %ode) '22a and 21a-
@Admittedly, the right to amend the by5laws lies solely in the discretion of the employer, this being in
the eercise of management prerogative or b.siness :.dgment) Mowever this right, etensive as it
may be, cannot impair the obligation of eisting contracts or rights) ) ) 4f we were to r.le otherwise, it
wo.ld enable an employer to remove any employee from his employment by the simple epediency
of amending its by5laws and providing that hisJher position shall cease to eist .pon the occ.rrence
of a specified event)A Salafranca v. Philamlife 2Pamplona3 1illage Homeowners, 122 S%RA *3,
'1,,0-)
4B) %OR$ORA/" $O<"RS, AU/MOR4/H A(G A%/4V4/4"S
1) C'($'()t& P'*&( )%- C)$)."ty 'Art) *3, %ivil %ode# Secs) 13 and *+#
Land Ban+ of the Philippines v. C7!, 1,2 S%RA 1+* K1,,2L-
Art) *3 =.ridical persons may ac7.ire and possess property of all 8inds, as well as inc.r
obligations and bring civil or criminal actions, in conformity with the laws and reg.lations of
their organi?ation)
Sec) 13 %orporate powers and capacity > "very corporation incorporated .nder this %ode has
the power and capacity;
1) /o s.e and be s.ed in its corporate name#
Revised Bagtas Reviewer by Ve and Ocfe 2A
2) Of s.ccession by its corporate name for the period of time stated in the articles of
incorporation and the certificate of incorporation#
1) /o adopt and .se a corporate seal#
*) /o amend its articles of incorporations in accordance with the provisions of this %ode#
+) /o adopt by5laws, not contrary to law, morals or p.blic policy, and to amend or repeal
the same in accordance with this %ode#
3) 4n case of stoc8 corporations, to iss.e or sell stoc8s to s.bscribers and to sell treas.ry
stoc8s in accordance with the provisions of this %ode# and to admit members to the
corporation if it be a non5stoc8 corporation#
6) /o p.rchase, receive, ta8e or grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with s.ch real and personal property, incl.ding sec.rities and bonds of
other corporations, as the transactions of the lawf.l b.siness of the corporation may
reasonably and necessary re7.ire, s.b:ect to the limitations prescribed by law and the
%onstit.tion#
0) /o enter into merger or consolidation with other corporations as provided in this %ode#
,) /o ma8e reasonable donations, incl.ding those for the p.blic welfare or hospital or
charitable, c.lt.ral, scientific, civic or similar p.rposes; $rovided, /hat no corporation,
domestic or foreign shall give donations in aid of any political party or candidate or for
p.rposes of partisan political activity#
12) /o establish pension, retirement, and other plans for the benefit of its directors,
tr.stees, officers and employees# and
11) /o eercise s.ch other powers as may be essential or necessary to carry o.t its
p.rpose or p.rposes as stated in the articles of incorporation)
Sec) *+ Ultra vires acts of corporations > (o corporation .nder this %ode shall possess or
eercise any corporate powers ecept those conferred by this %ode or by its articles of
incorporation and ecept s.ch as necessary or incidental to the eercise of the powers so
conferred)
A corporation has only s.ch powers as are epressly granted to it by law and by its
articles of incorporation, those which may be incidental to s.ch conferred powers, those
reasonably necessary to accomplish its p.rposes and those which may be incident to its
eistence) Pilipinas Loan Compan& v. S"C, 1+3 S%RA 1,1 '2221-)
)5 C#)33",".)t"'% ', C'($'()t& P'*&(3+ E&press7 "mplied7 and "ncidental
"B$R"SS 49$&4"G 4(%4G"(/A&
/hese powers given to a
corporation either;
a)- By clear or epress
provision of the law)
Some of the other
powers epressly
granted .nder Sec) 13
are considered to be
inherent or incidental
powers which even if
not given by epress
grant are
nevertheless deemed
to be within the
capacity of the
foreign entities 's.ch
as the power to adopt
/hose powers that eist as a
necessary conse7.ence of;
a)- the eercise of
epress powers of the
corporation or
b)- the p.rs.it of its
p.rpose as provided
for in the article of
incorporation
the
management
of a
corporation, in
the absence of
epress
restrictions,
has
/hose powers that;
a)- attach to a
corporation at the
moment of its
creation
b)- witho.t regard to its
epress powers or
partic.lar primary
p.rposes and
c)- is said to be inherent
in it as a legal entity
or a legal
organi?ation)
$owers that go into
the very nat.re and
etent of a
0,
by5laws-
b)- By the charter or articles
of incorporation)
"press grant of
a.thority from the
board of directors
needed to validly bind
the corporation)
/h.s the S% held that
absent any board
resol.tion a.thori?ing
an officer or any
person to eercise
epress powers given
to a corporation s.ch
as filing a s.it on its
behalf, s.ch an action
is invalid)
/he power of a
corporation to s.e
and be s.ed in any
co.rt is lodged with
the board of directors
that eercise its
corporate powers)
By5laws are not a
so.rce of powers)
discretionary
a.thority to
enter into
contracts or
transactions
which may be
deemed
reasonably
necessary or
incidental to
its b.siness
p.rpose)
corporationNs :.ridical
entity cannot be
pres.med to be
incidental or inherent
powers) /his :.ridical
entity is State5grant
and cannot be altered
or amended witho.t
State a.thority 'egs)
right of s.ccession,
right to merger-
Art) *3 of the %ivil
%ode epressly
provides for the
powers of a
corporation as a
:.ridical personality
possesses)
Sec) 13 of the
%orporation %ode
epressly en.merates
the ten powers which
a corporation may
eercise)
Sec) *+ of the
%orporation %ode
recogni?es other
powers provided in
the Article of
4ncorporation)
S.b5paragraph 11 of
Sec) 13 provide that a
corporation has the
power and capacity to
@eercise s.ch
powers as may be
essential or necessary
to carry o.t its
p.rpose or p.rposes
as stated in its
articles of
incorporation)
Sec) 2 of the %orp) %ode
provides the corporation as
having @the powers,
attrib.tes and properties
epressly a.thori?ed by law
or incident to its eistence)A
Eenerally eercised
by the Board of
Girectors with
eception to certain
instances where
shareholdersN assent
are needed)
Eenerally, p.rely
members of the Board
of Girectors eercise
this)
Eenerally, p.rely members
of the Board of Girectors
eercise this)
Revised Bagtas Reviewer by Ve and Ocfe 2A
Ultra Vires doctrine is connected with ancillary doctrines as of '1- apparent a.thority and of
'2- estoppel)
One has to loo8 at the corporation as a person before the law beca.se of the '1- iss.e of
consent and '2- liability > who commits itself to obligation) /he state only gives a corporation
limited powers and not general powers as an individ.al has beca.se of the consent and
liability)
475 W!&(& C'($'()t& P'*&( L'-9&-
A corporation has no power ecept those epressly conferred on it by the %orporation
%ode and those that are implied or incidental to its eistence) 4n t.rn, a corporation
eercises said powers thro.gh its board of directors andJor its d.ly a.thori?ed officers and
agents) ) ) 4n t.rn, physical acts of the corporation, li8e the signing of doc.ments, can be
performed only by nat.ral persons d.ly a.thori?ed for the p.rpose by corporate by5laws
or by a specific act of the board of directors) Shipside 'nc. v. Court of !ppeals, 1+2 S%RA
11* '2221-)
Unless otherwise provided by the %orporation %ode, corporate powers are eercised by
the Board of Girectors, which they may delegate to either an eec.tive committee,
officers or contracted managers) /he delegation, ecept for the eec.tive committee,
m.st be for specific p.rposes, which ma8es the officers the agents of the corporation, and
accordingly the general r.les of agency as to the binding effects of their acts wo.ld apply)
For s.ch officers to be deemed f.lly clothed by the corporation to eercise a power of the
Board, the latter m.st specially a.thori?e them to do so) !BS<CB Broadcasting Corp. v.
Court of !ppeals, 121 S%RA +62 '1,,,-)
$R49ARH RU&"; /he Board of GirectorsJ/r.stees is the repository of all corporate powers 'sec)
21-
/he so.rce of power of the board of directors is therefore primary and not delegated power
from the stoc8holders or members of the corporation) Mowever, there are specified instances
in the %orporation %ode where the partic.lar eercise of power of the corporation by the
board, in order to be binding and effective, re7.ires the consent and ratification of the
stoc8holders or members, on one hand, and the State, on the other hand)
4( %O(SO(A(%" <4/M %O(/RA%/ &A< $R4(%4$&"S > in conformity with the principles of
contract law, that a party cannot relieve himself from the contract.al terms and conditions,
m.ch less amend or alter them, witho.t the consent or approval of the other party or parties)
"B%"$/4O( /O /M" E"("RA& RU&", in cases where the stoc8holders consent is re7.ired,
ma:ority r.les) /he consent or dissent of the stoc8holders is recogni?ed by their ma:ority vote
or their 7.alified two5thirds as the case may be which wo.ld bind even those who abstained
or dissented) For those who dissented, there is a way o.t for them by way of eercising their
appraisal right 'depending on the iss.e-)
2. U!#RA 9"RES DC#R"NE
See relevant portions of V4&&A(U"VA, Corporate Contract Law, 10 A/"("O &)=) 1 '(o) 2,
=.ne 1,,*-)
4)5 Concept and #'pes 'Sec) *+-
Sec) *+ Ultra vires acts of corporations > (o corporation .nder this %ode shall possess or
eercise any corporate powers ecept those conferred by this %ode or by its articles of
incorporation and ecept s.ch as necessary or incidental to the eercise of the powers so
conferred)
Sec) *+ of the %orporation %ode is the stat.tory embodiment of the Ultra Vires Goctrine that
provides that the corporation cannot eercise powers beyond what had been granted to it by
stat.te or by its articles of incorporation ecept s.ch as necessary or incidental to the
eercise of powers so conferred) 4t was meant to control and reg.late the actions of
corporations)
,1
BAS4S OF U&/RA V4R"S GO%/R4(" '/wo %orporate $rinciples-
1) A corporation is a creat.re of the law and has only s.ch powers and privileges as are
granted by the State > the .ltra vires doctrine is a prod.ct of the theory of concession as
provided in Sec) 2)
2) /he doctrine .pholds the fid.ciary d.ty of directors and officers to the stoc8holders or
members > s.ch d.ty dictates that the corporation engage only in transactions to which the
stoc8holders and members bind themselves by way of the provisions of the p.rposes cla.se)
/his is also necessarily incl.de an obligation not to enter into transactions which violate the
law)
/"S/ /O G"/"R94(" U&/RA V4R"S > <hether the act in 7.estion is in direct and immediate
f.rtherance of the corporationNs b.siness, fairly incident to the epress powers and
reasonably necessary to their eercise) /he strict terms @direct and immediateA refers to the
b.siness of the corporation while the liberal terms @fairly incidentA and @reasonably
necessaryA with reference to the powers of the corporation) <ith regard to the b.siness of the
corporation as the reference point, m.ch latit.de is given to the corporation to enter into
vario.s contracts as long as they have logical relation to the p.rs.it of s.ch b.siness) On the
other hand, when the p.rpose cla.se .sed limiting words that %o.rt will hold s.ch corporation
to s.ch limited b.siness)
$O&4%4"S SU$"RV"(4(E 4( U&/RA V4R"S 4SSU"S > Acts not per se illegal, liberal interpretation)
1)- $UB&4% %O(V"(4"(%" > if corporation contracts are strictly constr.ed, the p.blic wo.ld be
inconvenienced by having to verify and enter into contract.al safeg.ards when entering into
contracts with corporations) As s.ch liberal constr.ction is afforded to s.ch corporate
contracts)
2)- %O(/RAV"(/4O(OF %O(/RA%/UA& "B$"%/A/4O(S > setting aside the corporate contract
on the gro.nd of .ltra vires wo.ld contravene the epectations of both parties who entered
into the contract epecting to be bo.nd)
1)- $R4(%4$&" OF BUS4("SS =UGE9"(/ > the co.rt will not sit in :.dgment to s.bstit.te their
b.siness :.dgment for that of the directors# and that as m.ch as possible, directors in the
eercise of their b.siness :.dgment, sho.ld be given leeway to adopt corporate policies and
to engage in transactions as they deem best for the corporation)
*)- (A/UR" OF BUS4("SS OF O$"RA/4O(S > it is impossible to anticipate all possible
contingencies at the time the Articles are drawn th.s there wo.ld be a need to amend or
revise the Articles to 8eep abreast with the vario.s aspects of the b.siness)
U&/RA V4R"S A%/S G4S/4(EU4SM"G FRO9 A%/S <M4%M AR" 4&&"EA& $"R S"
4llegal acts of a corporation are those acts which are contrary to law, morals, or p.blic
order or contravenes some r.le of p.blic policy or p.blic d.ty are void) S.ch acts or
contracts cannot be the basis of any co.rt action nor ac7.ire validity by performance,
ratification or estoppel)
Ultra vires acts are those which are not illegal and void ab initio b.t are within the
scope of the articles of incorporation are merely voidable and may become binding
and enforceable when ratified by stoc8holders) Said ratification c.res the infirmity of
the corporate act and ma8es it valid and enforceable)
/H$"S OF U&/RA V4R"S %AS"S
1)- acts or contracts which are per se illegal as being contrary to law VO4G
2)- acts done beyond the powers of the corporation as provided for in the law or its articles of
incorporation# and VO4G or VO4GAB&"D
1)- acts or contracts entered into in behalf of the corporation by persons who have no corporate
a.thority U("(FOR%"AB&"
Ultra vires acts of the second type are void as between the corporation and the State or in the
first level of corporate eistence while it is merely voidable in the third level beca.se of p.blic
Revised Bagtas Reviewer by Ve and Ocfe 2A
policy) /he p.blic who deals in good faith with the corporation has the right to epect that the
obligation entered into shall be complied with)
$irst #'pe Ultra 9ires1 An ultra vires act is one committed o.tside the ob:ect for
which a corporation is crated as defined by the law of its organi?ation and therefore
beyond the power conferred .pon it by law) /he term @ultra vires@ is @disting.ished from
an illegal act for the former is merely voidable which may be enforced by performance,
ratification, or estoppel, while the latter is void and cannot be validated)A a!trium
Management Corp. v. Court of !ppeals, 1+1 S%RA 21 '2221-)
A/R4U9 9A(AE"9"(/ %OR$) v) %OUR/ OF A$$"A&S
Facts; Mi5%ement thro.gh the corporate signatories 'Ge &eon > treas.rer, Gelas Alas > chairman-
iss.ed chec8s in favor of ")/) Menry I %o) 4nc) as a collateral for a loan- ")/) Menry endorsed the fo.r
chec8s to Atri.m for val.able consideration) Upon presentment for payment, the ban8 dishonored all
fo.r chec8s beca.se the payment was stopped) Atri.m filed with the R/% an action for collection of
the proceeds of fo.r postdated chec8s amo.nting to $29) /he /% ordered that Ge &eon, "/ Menry
and Mi5%ement pay Atri.m :ointly and severally the val.e of the fo.r chec8s pl.s interest) /he %A on
the other hand absolved Mi5%ement from liability)
4ss.e; <O( Ge &eon was not a.thori?ed to iss.e the chec8s
<O( the iss.ance of the chec8s were U&/RA V4R"S A%/S
Meld; Ge &eon was a.thori?ed and s.ch iss.ance is not an .ltra vires act)
Ratio; Ge &eon as treas.rer of the corporation is a.thori?ed to sign chec8s for the corporation) As a
r.le, the act of iss.ing chec8s is within the ambit of a valid corporate act) And sec.ring a loan to
finance the activities of the corporation is not an .ltra vires act) <hile an .ltra vires act is one
committed o.tside the ob:ect or which a corporation is created as defined by law of its organi?ation
and therefore beyond the power conferred .pon it by law, the act pertained to in the case is not an
illegal act)
Ge &eon on the other hand was negligent in confirming that s.ch chec8s were iss.ed to "/
Menry as payment for their companyNs debt with the former) /hat is why she was held to be
personally liable to Atri.m)
Second #'pe Ultra 9ires1 <hen the $resident enters into spec.lative contracts,
witho.t prior board approval, and witho.t s.bse7.ent s.bmission of those contracts to the
Board for approval or ratification, nor were the transactions incl.ded in the reports of the
corporation, s.ch contracts do not bind the corporation) 4t m.st be pointed o.t that the
Board of Girectors, not the $resident, eercises corporate powers) Safic !lcan # Cie v.
'mperial 1egetable 7il Co., 'nc., 1++ S%RA ++, '2221-)
475 Ratification of Ultra 9ires Acts1 'aPirovano v. /e la *ama Steamship Co., 'nc., ,3 $hil)
11+ K1,+*L# Carlos v. Mindoro Sugar Co., +6 $hil) 1*1 K1,12L# *epublic v. !co?e Mining
Co., 1 S%RA 131 K1,31L# aCrisologo )ose v. Court of !ppeals, 166 S%RA +,* K1,0,L#
aHarden v. Benguet Consolidated Mining Co., +0 $hil) 1*2 K1,11L-)
$4ROVA(O G" &A RA9A S/"A9SM4$ %O) 4(%)
Facts; /he story began with "nrico $erovano becoming $resident of the Gela Rama %orporation)
Under his management, the corporation grew into a m.lti5million company .ntil his death) Gon
"steban dela Rama who owned and controlled the stoc8 of the corporation, distrib.ted his
shareholdings among his five da.ghters incl.ding "stefania) /he company has a bonded
indebtedness amo.nting to $6,+22 in 1,*2 b.t had assetsJcapitals of $1+ 9 as of 1,*1 which were
mortgaged as sec.rity for the debt to the (ational Gevelopment %orp) /his bonded indebtedness was
converted to non5voting preferred shares of the company .nder the condition that they wo.ld bear a
fied c.m.lative divisor of 3R per ann.m and this was carried o.t in 1,*,) (G% now had the right to
be represented by fo.r o.t of nine members in the Board of Girectors) 4t was in 1,*3 that the Board
of Girectors adopted the 7.estioned resol.tion where the corporation ser aside $*22,222 to the fo.r
,1
minor children with the s.m convertible into shares of stoc8) &o.rdes de la Rama later learned that
since the company shares of stoc8 was act.ally 1)3 times their par val.e, the company wo.ld in
effect be giving them an amo.nt totaling to $1,**2,222 and that stoc8s if were given to the children,
the voting strength of the Ge la Rama da.ghters wo.ld be adversely affected) /his ca.sed &o.rdes
to as8 for the cancellation and waiver of her pre5emptive rights) Gon "steban then advised the
corporate secretary that the resol.tion be n.llified d.e to the mis.nderstanding as to its
implications)
4n 1,*6, the Board adopted a resol.tion changing the form of donation from *,222 shares to merely a
ren.nciation in favor of the children of the corporate right, titles and interests as beneficiary to the
proceeds of the life ins.rance policy s.b:ect to the condition that proceeds be retained by the
company as a loan with +R interest 'S121,+22-) "stefania as g.ardian of the children, accepted the
donation in their behalf) Said donation was formally ratified in 1,*, after "stefania bo.ght a ho.se in
(ew Hor8 for S6+,222) 4n 1,+2 Osmena =r) h.sband of &o.rdes de la Rama addressed an in7.iry to
the S"% as8ing for an opinion regarding the donation) S"% opined that the donation was void
beca.se the corporation co.ld not dispose of its assets by gifts) /herefore, it acted beyond the scope
of its powers) /h.s, the stoc8holders revo8ed the donation on this gro.nd)
<ith these revocation, plaintiff as represented by "stefania their mother, see8 t enforce this
resol.tions adopted by the Board of Girectors and Stoc8holders of Ge la Rama Steamship %o) giving
to said children the proceeds of the ins.rance policies of the deceased with the company as the
beneficiary) /he company contends that the resol.tion and the contract eec.ted p.rs.ant thereto
are .ltra vires and if valid, the obligation to pay the amo.nt given is not yet d.e and demandable)
$laintiffs won in the lower co.rt, hence this petition)
4ss.e; <O( the said Board of GirectorNs resol.tion was an .ltra vires actD
Meld;
/he grant or donation in 7.estion is rem.nerative in nat.re and was given in consideration of the
services rendered by the heirsN father to the corporation) /he donation has already been perfected
s.ch that the corporation co.ld no loner rescind it) 4t was embodied in a Board Resol.tion)
Representatives of the corporation and even its creditors as the (G% have given their conc.rrence)
/he resol.tion was act.ally carried o.t when the corporation and "stefania entered into an
agreement that the proceeds will be entered as a loan) "stefania accepted the donation and s.ch
was recorded by the corporation) /he Board of Girectors approved "stefaniaNs p.rchase of the ho.se
in (ew Hor8) %ompany stoc8holders formally ratified the donation)
/he donation was a corporate act carried o.t by the corporation not only with the sanction of the
Board of Girectors b.t also of its stoc8holders) /he donation has reached a stage of perfection which
is valid and binding .pon the corporation and cannot be rescinded .nless there eists legal gro.nds
for doing so) /he S"% opinion nor the s.bse7.ent Board Resol.tion are not s.fficient reasons to
n.llify the donation)
/he donation is also not an .ltra vires act) /he corporation was given broad and .nlimited powers to
carry o.t the p.rpose for which it was organi?ed which incl.des the power to '1- invest and deal with
corporate money not immediately re7.ired in s.ch manner as from time to time may be determined
'2- aid in any other manner to any person, association or corporation of which any obligation is held
by this corporation) /he donation .ndo.btedly comes within the scope of this broad power)
An .ltra vires act is '1- an act contrary to law, morals, or p.blic order or contravene some r.les of
p.blic policy or d.ty) 4t cannot ac7.ire validity by performance, ratification, estoppel) 4t is essentially
void '2- those within the scope of the Articles of 4ncorporation and not always illegal) 4t is merely
voidable and may become binding and enforceable when ratified by stoc8holders)
Since it is not contended that the donation is illegal or contrary to any of the epressed provisions of
the Articles of 4ncorporation nor pre:.dicial to the creditors of the corporation, said donation even if
.ltra vires is not void and if voidable, its infirmity has been c.red by ratification and s.bse7.ent atcs
of the corporation) /he corporation is now estopped or prevented from contesting the validity of the
donation) /o allow the corporation to .ndo what it has done wo.ld be most .nfair and contravene the
well5settled doctrine that the defense of .ltra vires cannot be se .p or availed of in any completed
transaction)
(O/"; /he ratification of the stoc8holders of the donation made is the 8ey in this case) Beca.se s.ch
Revised Bagtas Reviewer by Ve and Ocfe 2A
ratification is meant to protect the contract.al relationship or interest of stoc8holders)
%R4SO&OEO5=OS" v) %OUR/ OF A$$"A&S
Facts; Atty) Benares was the $resident of 9overs "nterprise while Ricardo Santos =r) was the Vice5
$resident) On April 1,02 Atty) Benares in accommodation of his clients, the spo.ses =aime and %larita
Ong iss.ed a chec8 drawn against /raders Royal Ban8 in the amo.nt of *+,222 payable to %risologo5
=ose) Since the chec8 was .nder the acco.nt of the corporation, the president and the treas.rer
sho.ld sign the chec8) B.t since the treas.rer was not available, Benares as8ed Santos to be the
alternate signatory) /he chec8 was iss.ed to %risologo5=ose in consideration of the waiver of
%risologo over a certain property which the EA4A agreed to sell to the clients of Benares 'spo.ses
Ong- with the .nderstanding that .pon approval of the compromise agreement with the spo.ses
Ong, the chec8 will be encashed accordingly) Mowever, the compromise agreement was not
approved within the epected period) So Benares replaced the chec8 with another one with the same
amo.nt also payable to =ose) <hen petitioner deposited the chec8, it was dishonored for ins.fficiency
of f.nd) $etitioner filed criminal complaint for violation of B$ 22) 9eanwhile, d.ring the preliminary
investigation, Santos tendered cashiers chec8 in payment of the dishonored chec8 b.t petitioner
ref.sed to accept it) Santos then encashed the chec8 and deposited the money to the %ler8 of %o.rt)
4ncidentally, Benares p.rchased the cashierNs chec8 and gave it to the plaintiff to be applied as
payment of the dishonored chec8) R/% held that it was not pers.aded to believe that consignation is
applicable here) So the complaint was dismissed) %A reversed and set aside s.ch decision) $etitioner
contends that the accommodation party in this case is 9over "nterprises and not private respondent
who merely signed the chec8 in a representative capacity)
4ss.e; Ass.ming that 9over "nterprises is the accommodation party, <O( it may be held liable on
the accommodation instr.ment)
Meld; (o) %orporation is not liable) /he provisions of the (4& which holds an accommodation party
liable on the instr.ment to a holder for val.e, altho.gh s.ch holder at the time of ta8ing the
instr.ment 8new him to be only an accommodation party, it does not apply to corporations which are
accommodation parties /his is beca.se iss.e or endorsement of negotiable paper by a corporation
witho.t consideration and for the accommodation is an .ltra vires act)
By way of a corporation, an officer or agent may do so O(&H 4F specifically a.thori?ed to do so) B.t
where the facts show that the accommodation involved was for their personal acco.nt, .nderta8ing
or p.rpose and the creditor was aware thereof)
(O/"; /hat while the p.blic is not re7.ired to 8now that one is a.thori?ed or not to bind the
corporation for a certain obligation and that while the contract may be enforced even witho.t
a.thority beca.se the p.blic dealing in good faith has the right to epect that the obligation entered
into shall be complied with, s.ch doctrine does not apply when the dealing p.blic in the first place is
in bad faith, as in this case# that is why the corporation was not bo.nd to s.ch accommodation
agreement)
MARG"( v) B"(EU"/ %O(SO&4GA/"G 94(4(E
Facts; Beng.et %onsolidated 9ining and Balatoc 9ining %o) are entities organi?ed for the
p.rpose of engaging in the mining of gold in the $hilippines and their respective properties lie
only a few miles apart) /he original stoc8holders of Balatoc were .nable to s.pply the means
for profitable operation th.s, its board ordered a s.spension of all wor8) A general meeting of
the stoc8holders approved to establish a committee to find investors) /he committee in t.rn
approached Bean, $resident and Eeneral manager of Beng.et to sec.re the necessary capital
for the development of the Balatoc properties) /he management of both companies eec.ted
a contract where Beng.et was to proceed with the development and constr.ction of a milling
plant for the mine and to erect a power plact) 4n ret.rn, Beng.et wo.ld receive from Balatoc
shares of par val.e of $322,222 in payment of the first 322,222 to be advanced to it)
,+
By 1,2,, Beng.et had spent $1,*16,,+2,1+ in p.rs.ance of the contract) Balatoc stoc8holders have
been receiving large dividends) Marden and two other stoc8holders filed a s.it against Beng.et,
Balatoc and the officers to ann.l the certificate covering $322,222 shares of Balatoc iss.ed to
Beng.et and to recover a large s.m of money alleged to have been .nlawf.lly collected by Beng.et
and to ann.l the contract) /he trial co.rt dismissed the complaint, hence this petition)
4ss.e; <O( it is lawf.l for Beng.et to hold any interest in another mining corporationD
Meld; (o) Section 6+ of the $hilippine Bill of 1,22 prohibits corporation engaged in mining from being
interested in any other corporation engaged in mining) /his was amended by Act (o) 1+10 which
now provided that a corporation is prohibited to hold more than 1+R of the O%S of another
corporation) /he %orp) &aw did not contain any cla.se directly penali?ing the acts of a corporation or
member in an interest contrary to Sec) 11 of Act 1*+,) /he penalties imposed by the %orp) &aw are
of s.ch nat.re that they can be enforced only by a criminal prosec.tion or by an action of 7.o
warranto which can only be maintained by the Atty) Eeneral) Beng.et %o) has committed no civil
wrong against the plaintiff stoc8holders and if a p.blic wrong is committed, the directors of Balatoc
and plaintiff Marden himself were the active ind.cers of the commission of that wrong) /he contracts
have been performed on both sides and there is no possibility of .ndoing what has been done)
$laintiffs then invo8e Art) 112+ which declares that an innocent party to an illegal contract may
recover anything that he may have given while he is not bo.nd to f.lfill any promise he may have
made) S.pposing this is applicable, the general remedy provided by Art) 112+ cannot be invo8ed
where a special remedy is s.pplied in special law)
4n as m.ch as the corporation law prohibits the ac7.isition by one mining corporation of any interest
in another and that these were enacted in the eercise of general police power of the government, it
res.lts that where a corporation does so, the stoc8holders cannot maintain an action to ann.l the
contract by which s.ch interest was ac7.ired) /he remedy m.st be so.ght in a criminal proceeding
or 7.o warranto action instit.ted by the government) Until th.s assailed in a direct proceeding, the
contract by which the interest was ac7.ired will be treated as valid as between the parties)
(O/"; <e are st.dying Marden beca.se of the prono.ncement that even where corporate contracts
are illegal per se, when only p.blic or government policy is at sta8e and no private wrong is
committed, the co.rts will leave the parties as they are in accordance with their original contract.al
epectations) '/he only contracts that the co.rts will to.ch are contracts which are void for being
illegal per se)-
4"5 #)eor' of Estoppel or Ratification
/he principle of estoppel precl.des a corporation and its Board of Girectors from
denying the validity of the transaction entered into by its officer with a third party who
in good faith, relied on the a.thority of the former as manager to act on behalf of the
corporation) aLipat v. Pacific Ban+ing Corp., *22 S%RA 11, '2221-)
4n order to ratify the .na.thori?ed act of an agent and ma8e it binding on the
corporation, it m.st be shown that the governing body or officer a.thori?ed to ratify
had f.ll and complete 8nowledge of all the material facts connected with the
transaction to which it relates) Ratification can never be made on the part of the
corporation by the same person who wrongf.lly ass.me the power to ma8e the
contract, b.t the ratification m.st be by the officer or governing body having a.thority
to ma8e s.ch contract) 1icente v. -eralde., +2 S%RA 212 '1,61-)
/he admission by co.nsel on behalf of the corporation of the latterNs c.lpability
for personal loans obtained by its corporate officers cannot be given legal effect when
the admission was @witho.t any enabling act or attendant ratification of corporate
act,A as wo.ld a.thori?e or even ratify s.ch admission) 4n the absence of s.ch
ratification or a.thority, s.ch admission does not bind the corporation) !guen.a v.
Metropolitan Ban+ and %rust Co., 261 S%RA 1 '1,,6-)
Doctrine of !ac)es or 4Stale Demands61 /he principle of laches or @stale
demandsA provides that the fail.re or neglect, for an .nreasonable and .neplained
length of time, to do that which by eercising d.e diligence co.ld or sho.ld have been
Revised Bagtas Reviewer by Ve and Ocfe 2A
done earlier, or the negligence or omission to assert a right within a reasonable time,
warrants a pres.mption that the party entitled to assert it either has abandoned it or
declined to assert it) *ovels "nterprises, 'nc. v. 7campo, 1,1 S%RA 163 '2222-)
$R4(%4$&" OF "S/O$$"& 4t being merely voidable, an .ltra vires act can be enforced or
validated if there are e7.itable gro.nds for ta8ing s.ch action) Mere it is fair that the
resol.tion be .pheld at least on the gro.nd of estoppel)
Ratification 'a- the act m.st be cons.mmated and not eec.tory 'b- creditors are not
pre:.diced or all of them have given their consent 'c- rights of the p.blic or the State are not
involved 'd- all the stoc8holders m.st give their consent)
4""5 #)eor' of Apparent Aut)orit' 'Art) 1001, %ivil %ode#aPrime 5hite Cement Corp. v.
'!C, 222 S%RA 121, 111511* K1,,1L# a,rancisco v. -S'S, 6 S%RA +66 K1,31L# a@ao 0a
Sin %rading v. C!, 22, S%RA 631 K1,,2L-)
O.tward appearance, the agentNs apparent representation yields to the principalNs tr.e
representation and the contract is considered as entered into between the principal and the
third person)
G.e what seems to be and what happens otherwise)
C; Upon whom is placed the b.rden of discovering that the agent has no a.thorityD
A; 4n view of the a.thority of apparent a.thority, the third person dealing with the corporation
is not given the b.rden of discovering whether the agent has a.thority or not) 4t is also
therefore reasonable in a case where an officer of a corporation has made a contract in its
name, that the corporation sho.ld be re7.ired, if it denies the a.thority of the officer, to state
s.ch defense in its answer, since it allows the plaintiff to be appraised of the fact that the
agentNs a.thority is contested# and he is given an opport.nity to add.ce evidence showing
either that the a.thority eisted or that the contract was ratified and approved)
(O/"; /he theory of apparent a.thority is classified into two types by which s.ch may be
manifested or proved, which are by position and by circ.mstance) /he b.rden of proof
mentioned above applies to the second classification)
$R49" <M4/" %"9"(/ %OR$) v 4(/"R9"G4A/" A$$"&&A/" %OUR/
Facts; A director '/e- entered into an agreement of Gealership agreement with $<%%, signed by its
chairman and president of the corporation to s.pply 22,222 bags of white cement per month for five
years at a fied price of $,)62 per bag) S.bse7.ently, the Board ref.sed to abide by the contract
.nless new conditions are accepted providing for a new price form.la) /he dealing director s.ed for
specific performance on the contract)
Meld; /he %o.rt held that .nder both the %orporation &aw then and the present %orporation %ode,
the doctrine is that all corporate powers shall be eercised by the Board of Girectors, ecept as those
provided by law) Altho.gh it cannot completely abdicate its powers and responsibility to act for the
:.ridical entity, the Board may epressly delegate specific powers to its president or any of its
officers) 4n the absence of s.ch epress delegation, a contract entered into by its $resident on behalf
of the corporation may still bind the corporation if the Board sho.ld ratify the same epressly or
impliedly)
4mplied ratification ta8es vario.s forms '1- silence or ac7.iescence '2- by acts showing approval or
adoption of the contract or '1- by acceptance and retention of the benefits flowing therefrom)
"ven in the absence of epress or implied a.thority by ratification, the $resident as a general r.le
may bind the corporation by a contract in the ordinary co.rse of b.siness, provided the same is
reasonable .nder the circ.mstances) /hese r.les are basic b.t general and fleible) Applies where
the $resident is dealing with third persons b.t different where a director is dealing with his own
corporation)
/he co.rt herein held that the director holds a position of tr.st and as s.ch he owes a d.ty of loyalty
to his corporation and his contracts with the corporation m.st always be at reasonable terms,
,6
otherwise the contract is void or voidable at the instance of the corporation) /he co.rt here fo.nd the
terms of the Gealership Agreement were .nreasonable for the corporation and that the .nfairness in
the contract was a basis which renders a contract entered into the $resident witho.t a.thority from
the Board, void or voidable, altho.gh it may have been in the ordinary co.rse of b.siness)
(O/"; /he $resident as the highest office of the corporation, by practice and :.rispr.dence embodies
apparent a.thority) On the other hand, the general manager on its own may or may not embody
s.ch a.thority depending on the circ.mstances that go with it) /he corporate secretary and lawyer
en:oy no s.ch pres.mption beca.se their positions do entail m.ch commercial significance)
FRA(%4S%O v) ES4S
Facts; /rinidad Francisco mortgaged to ES4S a parcel of land with 21 b.ngalows 'Vic59ari %ompo.nd-
for a $*22,222 loan of which $113,122 was released payable within 12 years with 6R interest per
ann.m compo.nded monthly) 4n 1,+, ES4S etra:.dicially foreclosed the mortgage on the gro.nd of
defa.lt of payment in the amo.nt of $12,222 ' total payment amo.nted to $112,222- where ES4S
was also the b.yer) Atty) Francisco, the father of /rinidad proposed to the Eeneral 9anager of ES4S
to pay $12,222 of the $+2,222 and as8ed that the foreclos.re be set aside and for ES4S to ta8e over
the administration of the mortgaged property and to collect installments d.e on the .npaid p.rchase
price for more than 11 ho.se and lot payees to be applied to the arrearage and the loan) /he ES4S
approved this and Atty) Francisco was notifed by telegram) ES4S accepted a chec8 for $12,222 and
remittances totaling to $**,121)2, for which the corresponding ORNs were iss.ed) ES4S then sent 1
letters signed by the E9 as8ing a proposal for the payment of the debt since the 1yr) $eriod for
redemption had epired)
Atty) Francisco protested and bro.ght to the attention of ES4S the concl.ded contract and its
acceptance by telegram) ES4S replied as8ing payment for vario.s epenses and that the telegram
sho.ld be disregarded for its fail.re toe epress the content of a board resol.tion d.e to error of its
minor employees in the sending of the telegram) /he approval was apparently conditioned on Atty)
FranciscoNs agreement to pay all epenses inc.rred in foreclos.re) ES4S held that the remittances
were ins.fficient so that ES4S consolidated title to the compo.nd in its name) Mence, this s.it for
specific performance and damages) /he lower co.rt r.led in favor of Francisco)
Meld; /he S% finds no reason for altering the concl.sion that the offer of compromise made by
Francisco had been validly accepted and was binding on the defendant ES4S) /he terms of the offer
were clear and the acceptance of the proposal was signed by the E9 Andal) /he telegram hinted on
no anomaly and was within AndalNs apparent a.thority)
%orporation transactions wo.ld speedily come to a standstill where every person dealing with a
corporation held d.ty5bo.nd to disbelieve every act of its responsible officers, no matter how reg.lar
they sho.ld appear on their face)
4f a corporation 8nowingly permits one of its officers or any other agent within the scope of an
apparent and th.s holds him o.t to the p.blic as possessing power to do those acts, the corporation
will as against any one who has in good faith dealt with the corporation thro.gh s.ch agent be
estopped from denying s.ch a.thority) Mence, even if it were the Board Secretary who sent the
telegram, the corporation co.ld not evade the binding effect prod.ced by the telegram) /he
corporation had s.fficient notice of the allegedly .na.thori?ed telegram when it poc8eted the
$12,222 b.t 8ept silent abo.t it)
Onowledge of facts ac7.ired or possessed by an officer or agent of a corporation in the co.rse of his
employment and in relation to matters within the scope of his a.thority is notice to the corporation,
whether he comm.nicates s.ch 8nowledge or not)
/he silence ta8en together with the .nconditional acceptance of 1 other s.bstantial remittances of
the original agreement constit.te a binding ratification of the original agreement) Ratification may be
effected epressly or tacitly) /here is tacit ratification if with 8nowledge of the reason which renders
it voidable and s.ch reason having ceased, to a person who has a right to invo8e it sho.ld eec.te
an act which necessarily implies an intention to waive his right)
As between two innocent parties, the one who made it possible for the wrong to be done sho.ld be
Revised Bagtas Reviewer by Ve and Ocfe 2A
the one t bear the res.lting loss)
HAO OA S4( /RAG4(E v) %OUR/ OF A$$"A&S
Facts;
9aglana, the president and chairman of $<%% sent a letter to Hao Oa Sin /rading represented by its
manager Hao) 4t 7.oted the following $2*)12J,* lbs) Bag net FOB %"BU# $2*)12J,* lbs) Bag FOB
Ast.rias# *+,222 bags '1+,222Jmonth-) On =.ne 12, 1,61 9r) Hao accepted the letter offer and iss.ed
a chec8 for $2*1,222, $<%% Board of Girectors disapproved the same) On =.ly +, 1,61 $<%%
informed HOS of the disapproval) Mowever with respect to the 12,222 bags of cement) HOS accepted
witho.t protest) On A.g.st *, 1,61 $<%% wrote a letter to HOS stating that it is withdrawing or ta8ing
delivery of not less than 12,222 bags of cement) On September 12, 1,61 HOS insisted on the delivery
of the *+,222 bags of cement) On Gecember 6, 1,61 $<%% only delivered ,,66+ bags) HOS filed an
action for specific performance with the %F4) 4t was discovered that $<%% by5laws give the %hairman
and the $resident the power to eec.te and sign for and in behalf of the corporation all contracts or
agreements which the corporation enters into s.b:ect to the 7.alification that all his act.ations shall
be given to the Board of Girectors of the corporation) $<%% contends that 9r) 9aglana was not
a.thori?ed to ma8e any offer and sign a contract in behalf of the corporation and only the Board has
the power to do so) /he lower co.rt r.led in favor of HOS b.t the %A reversed) Mence, this peition)
4ss.e; <O( the contract originally entered into by $<%% thro.gh $resident 9aglana, binds the
corporation despite the re:ection of the Board of Girectors)
Meld;
/he by5laws do not confer .pon the $resident, the a.thority to enter into contracts independently of
the Board of Girectors) /he fact that contracts are signed thro.gh the $resident was only meant to
epedite its eec.tion b.t still pres.pposes a prior act of the corporation, thro.gh the Board of
Girectors) (o greater a.thority can be implied from s.ch epress, b.t limited, delegated a.thority) 4t
may be pres.med that the $resident has a.thority to ma8e contracts if he is given general control
and s.pervision over affairs of the corporation) B.t here, there is a general manager charged with
direct management of the b.siness which 9r) 9aglana was not involved in)
/he doctrine on apparent a.thority provide that if a private corporation intentionally or negligently
clothes its officers or agents with apparent power to perform acts for it, the corporation will be
estopped to deny that s.ch apparent a.thority is real, as to innocent 1
rd
persons dealing in good faith
with s.ch officers or agents) /his apparent a.thority may res.lt from; '1- the general manager by
which the corporation holds o.t an officer or agents as having power to act '2- the ac7.iescence in
his acts of a partic.lar nat.re, with act.al or constr.ctive 8nowledge thereof, whether with or witho.t
the scope of power) Mowever, HOS failed to prove that $<%% indeed clothed 9r) 9aglana with
apparent power) $<%% also showed that no contract can be signed by the $resident witho.t the
Board of GirectorsN approval 'and clearance from the (4G% representative and legal co.nsel-) /he
first contract is at most .nenforceable)
/he first contract was disapproved and re:ected by the Board of Girectors which at the same time
considered the $2*1,222 received by 9aglana as payment for 12,222 bags of cement, treated as an
entirely different contract) HOS had in fact agreed to this by accepting the delivery receipt witho.t
protest)
(O/"; Under the doctrine of apparent a.thority and .nder the s.b5classification of apparent
a.thority by circ.mstance, the first contract is .nenforceable beca.se $<%% effectively proved
thro.gh clear and convincing evidence that their $resident cannot bind the corporation witho.t
a.thori?ation from the Board of Girectors, so not the b.rden shifted .pon HOS for him to provide for
s.ch circ.mstances which have led him to believe that the $resident has s.ch apparent a.thority to
bind the corporation# however s.ch was not effectively discharged by HOS, that is why the first
contract is .nenforceable) Also, it is most important to note, that the contract for 12,222 bags of
cement is enforceable beca.se s.ch is a contract of sale entered into by the $resident in the reg.lar
co.rse of b.siness of the corporation) Mowever, the *+,222 bags contract is .nenforceable beca.se it
is a contract of dealership which is in the etraordinary co.rse of the b.siness of the corporation),
hence, not within the p.rview of the apparent a.thority of the $resident)
,,
(O/"; By5laws can bind third parties only when they have 8nowledge of s.ch, otherwise, s.ch may
not bind third parties) 4n the same manner, 8nowledge of a third person of s.ch by5laws may bind the
corporation)
4f a corporation 8nowingly permits one of its officers to act within the scope of an
apparent a.thority, it holds him o.t to the p.blic as possessing the power to do those
acts, the corporation will, as against anyone who has in good faith dealt with it thro.gh
s.ch agent, be estopped from denying the agentNs a.thority) Soler v. Court of !ppeals,
1+0 S%RA +6 '2221-)
/he a.thority of a corporate officer dealing with third persons may be act.al or
apparent ) ) ) the principal is liable for the obligations contracted by the agent) /he
agentN apparent representation yields to the principalYs tr.e representation and the
contract is considered as entered into between the principal and the third person) ,irst
Philipine 'nternational Ban+ v. Court of !ppeals, 2+2 S%RA 2+, '1,,3-)
$ersons who deal with corporate agents within circ.mstances showing that the
agents are acting in ecess of corporate a.thority, may not hold the corporation liable)
%raders *o&al Ban+ v. Court of !ppeals, 23, S%RA 321 '1,,6-)
Apparent a.thority may be ascertained thro.gh '1- the general manner in which the
corporation holds o.t an officer or agent as having the power to act, or, in other words
the apparent a.thority to act in general with which is clothes them# or '2- the
ac7.iescence in his acts of a partic.lar nat.re, with act.al or constr.ctive 8nowledge
thereof, within or beyond the scope of his ordinary powers) 'nter<!sia 'nvestment
'ndustries v. Court of !ppeals, *21 S%RA *+2 '2221-)
<hen a ban8ing corporation, when an officers arranges a credit line agreement and
forwards the same to the legal department at its head officer, and the ban8 did no
disaffirm the contract, then it is bo.nd by it) Premier /ev. Ban+ v. Court of !ppeals,
E)R) (o) 1+,1+2, 1* April 222*)
A corporation cannot disown its $residentNs act of applying to the ban8 for credit
accommodation, simply on the gro.nd that it never a.thori?ed the $resident by the lac8
of any formal board resol.tion) /he following placed the corporation and its Board of
Girectors in estoppel in pais; Firstly, the by5laws provides for the powers of the
$resident, which incl.des, eec.ting contracts and agreements, borrowing money,
signing, indorsing and delivering chec8s# secondly, there were already previo.s
transaction of disco.nting the chec8s involving the same personalities wherein any
enabling resol.tion from the Board was dispensed with and yet the ban8 was able to
collect from the corporation) a&co Sales Corp. v. B! ,inance Corp., 222 S%RA 316
'1,,1-)
(H%O SA&"S %OR$ORA/4O( v BA F4(A(%" %OR$ORA/4O(
Facts;
R.fino Hao was the $resident and Eeneral 9anager of (yco Sales %orporation which was engaged in
the b.siness of selling constr.ction materials) (yco Sales thro.gh Hao was approached by Santiago
and Renato Fernande? on behalf of Sanshell %orporation re7.esting for credit accommodation since
(yco had disco.nting privileges with BA Finance) /he Fernande?es wen to Hao for the p.rpose of
disco.nting their post5dated B$4 chec8 worth $32,222 made payable to (yco) /he disco.nting
process agreed .pon was that (yco thro.gh Hao endorsed the chec8 to BA Finance then BA Finance
wo.ld iss.e a chec8 payable to (yco for which (yco wo.ld then endorse it to Sanshell) <ith the
echange of chec8s, the parties agreed to a Geed of Assignment eec.ted by (yco in favor of BA
Finance the s.b:ect of which was the chec8) /he Geed contained a %ontin.ing S.retyship Agreement
at the bac8 whereby the Fernande?es .nconditionally g.aranteed to BA Finance f.ll and prompt
payment and discharge of any and all indebtedness of (yco) B$4 chec8 was dishonored which
therefore led BA Finance to report it to the Fernade?es) /hey then iss.ed another chec8, this time
from Sec.rity Ban8 which was also dishonored) Gespite repeated demands, (yco and Fernande?es
failed to settle their obligation which prompted BA Finance to file an action in co.rt) /% r.led against
(yco and the Fernande?es to pay :ointly and severally) (ycoNs cross5claim against the Fernade?es
Revised Bagtas Reviewer by Ve and Ocfe 2A
was denied they were not declared in defa.lt in connection with the cross5claim and that no
evidence was presented 'it was also mentioned that (yco sho.ld have impleaded Sanshell by way of
a third party complaint and not a cross5claim-) %A affirmed the /% with modifications)
4ss.e; <O( (yco can be held liable for its $resident .na.thori?ed acts)
Meld;
(yco as an assignor5vendor warranted that both the credit itself 'its eistence and legality- and the
person of the debtor 'his solvency- according to Article 1320of the (%%) /herefore, any breach of the
warranties, the assignor sho.ld be held answerable) 4t is of no 7.estion that the assignor is liable for
the invalidity of whatever he assigned) /he deed of assignment eec.ted by (yco in favor of BA
Finance with Sanshell as debtor) BA Finance is act.ally enforcing the assignment) /he chec8 is
merely an incidental matter and so (yco is not being held liable for both the B$4 and the Sec.rity
Ban8 chec8 b.t rather the deed of assignment) /he iss.e on no notice of dishonor was given is belied
not only by the formal demand letter b.t also the findings of the /% that Hao and the Fernande?es
had fre7.ent contacts before, d.ring and after dishonor) /here is no novation beca.se there was no
epress agreement that BA Finance#s acceptance with Sec.rity Ban8 chec8 will discharge (yco from
liability) (either is there incompatibility beca.se both chec8s were given precisely to terminate a
single obligation)
(yco disowned the $residentNs acts claiming that it had not a.thori?ed Hao to apply to BA Finance for
credit accommodation saying that it did not iss.e a board resol.tion giving s.ch a.thority) Mowever,
the by5laws clearly provide for the power of its $resident, which incl.de eec.ting contracts and
agreements, borrowing money, signing, indorsing and delivering chec8s, all in behalf of the
corporation) Also, there was already a prior transaction of disco.nting chec8s involving the same
parties wherein any enabling resol.tion from (yco was dispensed with and yet BA was still able to
collect from (yco and Sanshell was able to discharge of its liabilities) /herefore, that places (yco
.nder estoppel in pais which arises when one, by his acts, representations or admissions, or by his
silence when he o.ght to spea8 o.t, intentionally or thro.gh c.lpable negligence, ind.ce another to
believe certain facts to eist and s.ch other rightf.lly relies on s.ch belief, so that he will be
pre:.diced if the former is permitted to deny the eistence of s.ch fact))
$er its SecretaryNs %ertificate, the fo.ndation had given its $resident ostensible and
apparent a.thority to inter alia deal with the respondent Ban8, and therefore the
fo.ndation is estopped from 7.estioning the $residentNs a.thority to obtain the s.b:ect
loans from the respondent Ban8) Lapulapu ,oundation, 'nc., v. Court of !ppeals, E)R)
(o) 123223, 2, =an.ary 222*)
0. E2$(&33 P'*&(3
)5 Enumerated Po(ers 'Secs) 13-
Sec) 13 %orporate powers and capacity > "very corporation incorporated .nder this %ode has
the power and capacity;
1)- /o s.e and be s.ed in its corporate name#
2)- Of s.ccession by its corporate name for the period of time stated in the articles of
incorporation and the certificate of incorporation#
1)- /o adopt and .se a corporate seal#
*)- /o amend its articles of incorporations in accordance with the provisions of this
%ode#
+)- /o adopt by5laws, not contrary to law, morals or p.blic policy, and to amend or
repeal the same in accordance with this %ode#
3)- 4n case of stoc8 corporations, to iss.e or sell stoc8s to s.bscribers and to sell
treas.ry stoc8s in accordance with the provisions of this %ode# and to admit
members to the corporation if it be a non5stoc8 corporation#
6)- /o p.rchase, receive, ta8e or grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with s.ch real and personal property, incl.ding sec.rities and bonds
of other corporations, as the transactions of the lawf.l b.siness of the corporation
12
1
may reasonably and necessary re7.ire, s.b:ect to the limitations prescribed by law
and the %onstit.tion#
0)- /o enter into merger or consolidation with other corporations as provided in this
%ode#
,)- /o ma8e reasonable donations, incl.ding those for the p.blic welfare or hospital or
charitable, c.lt.ral, scientific, civic or similar p.rposes; $rovided, /hat no
corporation, domestic or foreign shall give donations in aid of any political party or
candidate or for p.rposes of partisan political activity#
12)-/o establish pension, retirement, and other plans for the benefit of its directors,
tr.stees, officers and employees# and
11)-/o eercise s.ch other powers as may be essential or necessary to carry o.t its
p.rpose or p.rposes as stated in the articles of incorporation)
75 E&tend or S)orten Corporate #erm 'Secs) 16 and 01 K1L-
Sec) 16 $ower to etend or shorten corporate term > A private corporation may etend or
shorten its term as stated in the articles of incorporation when approved by ma:ority vote of
the board of director or tr.stees and ratified at a meeting by the stoc8holders representing at
least 2J1 of the o.tstanding capital stoc8 or by at least 2J1 of the members in case of non5
stoc8 corporation) <ritten notice of the proposed action and of the time and place of the
meeting shall be addressed to each stoc8holder or member at his place of residence as shown
on the boo8s of the corporation and deposited to the addressee in the post office with
postage prepaid or served personally) $rovided, that in case of etension of corporate term,
any dissenting stoc8holder may eercise his appraisal right .nder the conditions provided in
this code)
Sec) 01K1L 4nstances of appraisal right > Any stoc8holder of a corporation shall have the right
to dissent and demand payment of all the fair val.e of his shares in the following instances; 4n
case any amendment to the articles of incorporation has the effect of changing or restricting
the rights of any stoc8holders or rights of any stoc8holder class of shares, or of a.thori?ing
preferences in any respect s.perior to those o.tstanding shares of any class, or of etending
or shortening the term of the corporate eistence)
S.ch power only concerns the =.ridical "ntity &evel > s.ch etending or shortening of the term
of the corporation tampers with the powers given the corporation by the State)
C; <hy sho.ld s.ch etension or shortening re7.ire the ratificatory vote of stoc8holders when
this does not concern the b.siness enterprise level b.t the :.ridical entity levelD
A; S.ch in effect is an amendment of the articles of incorporation, and any amendment to
s.ch wo.ld always re7.ire the consent of the State and of the corporationNs stoc8holders)
/hey also have a say in this beca.se the etension or shortening of the corporate term
affects these stoc8holderNs investments)
C; <hy do stoc8holders not have appraisal right with respect to the shortening of the
corporate term whereas they do in the etension of the corporate termD
A; Act.ally, there is a seeming conflict between Sec) 16 which ma8es no mention of
stoc8holderNs appraisal right with respect to the shortening of the corporate term while Sec)
01'1- refers to s.ch) %&V tells .s that stoc8holders sho.ld be afforded an appraisal right even
in the case of the shortening of the corporate term beca.se it is not eno.gh to tal8 of free
transferability of interests when yo. dissent to the decrease beca.se s.ch concerns ones
epectations with respect to the b.siness enterprise)
.5 "ncrease or Decrease Capital Stock 'Sec) 10-
Sec) 10 $ower to increase or decrease capital stoc8# inc.r, create or increase bonded
indebtedness > (o corporation shall increase or decrease its capital stoc8 or inc.r, create or
increase any bonded indebtedness .nless approved by a ma:ority vote of the board of
directors and, at a stoc8holderNs meeting d.ly called for the p.rpose, 2J1 of the o.tstanding
capital stoc8 shall favor the increase or dimin.tion of the capital stoc8, or the inc.rring,
creating, or increasing ant bonded indebtedness) <ritten notice of the proposed increase or
Revised Bagtas Reviewer by Ve and Ocfe 2A
dimin.tion of the capital stoc8 or of the inc.rring, creating, or increasing of any bonded
indebtedness and of the time and place of the stoc8holders meeting at which the proposed
increase or dimin.tion of the capital stoc8 or the inc.rring or increasing of any bonded
indebtedness is to be considered, m.st be addressed to each stoc8holder at his place of
residence as shown on the boo8s of the corporation and deposited to the addressee in the
post office with postage prepaid, or served personally)
A certificate in d.plicate m.st be signed by a ma:ority of directors of the corporation and
co.ntersigned by the chairman and the secretary of the stoc8holdersN meeting, setting forth;
'1- /hat the re7.irements of this section have been complied with#
'2- /he amo.nt of the increase or dimin.tion of the capital stoc8#
'1- 4f an increase of the capital stoc8, the amo.nt of capital stoc8 or n.mber of shares of
no5par stoc8 thereof act.ally s.bscribed the names, nationalities, residences of the
persons s.bscribing, the amo.nt of capital stoc8 or n.mber of no5par stoc8 s.bscribed
by each), and the amo.nt paid by each on his s.bscription in cash or property, or the
amo.nt of capital stoc8 or n.mber of shares of no5par stoc8 allotted to each
stoc8holder if s.ch increase is for the p.rpose of ma8ing effective stoc8 dividend
thereof a.thori?ed#
'*- Any bonded indebtedness to be inc.rred, created or increased#
'+- /he act.al indebtedness of the corporation on the day of meeting#
'3- /he amo.nt of stoc8 represented at the meeting# and
'6- /he vote a.thori?ing the increase or dimin.tion of the capital stoc8, or the inc.rring,
creating, or increasing of any bonded indebtedness)
Any increase or decrease in the capital stoc8 or the inc.rring, creating or increasing any
bonded indebtedness shall re7.ire prior approval of the Sec.rities and "change %ommission)
One of the d.plicate certificates shall be 8ept on file in the office of the corporation and the
other shall be filed with the Sec.rities and "change %ommission and attached to the original
articles of incorporation) From and after approval by the Sec.rities and "change %ommission
and the iss.ance by the %ommission of its certificate of filing, the capital stoc8 shall stand
increased or decreased and the inc.rring, creating or increasing any bonded indebtedness
a.thori?ed, as the certificate of filing may declare $rovided, /hat the Sec.rities and "change
%ommission shall not accept for filing any certificate of increase of capital stoc8 .nless
accompanied by the sworn statement of the treas.rer of the corporation lawf.lly holding
office at the time of the filing of the certificate, showing that at least 2+R of s.ch increased
capital stoc8 has been s.bscribed and that at least 2+R of the amo.nt s.bscribed has been
paid either in act.al cash to the corporation or that there has been transferred to the
corporation property the val.ation of which is e7.al to 2+R of the s.bscription; $rovided
f.rther, that no decrease of the capital stoc8 shall be approved by the %ommission if its effect
shall pre:.dice the rights of corporate creditors)
(on5stoc8 corporations may inc.r or create bonded indebtedness or increase the same with
the approval by a ma:ority vote of the board of tr.stees and of at least 2J1 of the members in
a meeting d.ly called for that p.rpose)
Bonds iss.ed by a corporation shall be registered with the Sec.rities and "change
%ommission, which shall have the a.thority to determine the s.fficiency of the terms thereof)
/he policy behind the non5granting of appraisal right with respect to the increase and
decrease of the capital of the corporation is the fact that every stoc8holder sho.ld come into
the corporation setting aware that the epediencies of corporate life may re7.ire that
event.ally the corporation may need to increase capitali?ation to f.nd its operations or
epansions, and needs to loo8 primarily into its e7.ity investors to f.nd the same)
4n the increase, a stoc8holder may always sell his stoc8 if he dissents to the increase of the
capital stoc8) 9oreover, s.ch appraisal right may defeat the p.rpose of the corporation in
increasing the f.nds# by increasing the f.nds for s.rvival, if yo. grant the appraisal right in
12
1
effect yo. pay o.t capital when yo. see8 to 8eep more money inside)
4n the decrease of capital stoc8, why appraise when in effect yo. will be ret.rning capital to
yo.r stoc8holders)
Gespite the board resol.tion approving the increase in capital stoc8 and the receipt of
payment on the f.t.re iss.es of the shares from the increased capital stoc8, s.ch f.nds do
not constit.te part of the capital stoc8 of the corporation .ntil approval of the increase by
S"%) Central %e(tile Mills, 'nc. v. ational 5ages and Productivit& Commission, 232
S%RA130 '1,,3-)
A red.ction of capital to :.stify the mass layoff of employees, especially of .nion
members, amo.nts to nothing b.t a premat.re and plain distrib.tion of corporate assets
to obviate a :.st sharing to labor of the vast profits obtained by its :oint efforts with capital
thro.gh the years, and wo.ld constit.te .nfair labor practice) Madrigal # Co. v. Damora,
1+1 S%RA 1++ '1,06-)
<hy do yo. need the consent of the stoc8holders when yo. increase or decrease capital
stoc8D <hen yo. increase the capital stoc8, stoc8holders have to p.t in more money to
maintain their proportionate interest in the corporation, as s.ch the increase dil.tes the val.e
of the stoc8 they have prior to s.ch increase) 9oreover, s.ch increase affects their rights as
in their voting capacity, their sharing in the dividends, their participation in the management,
the etent of their participation in the dissol.tion of the corporation, etc) /he consent of the
stoc8holders is needed beca.se s.ch change once again affects their contract.al epectation
when they first entered into the corporation)
B.t in decreasing capital stoc8, why do yo. again need the consent of the stoc8holders
whereas in effect they will be receiving part of their investmentD S.ch once again affects their
contract.al epectation when they first entered into the corporation)
-5 "ncur, Create or "ncrease 0onded "ndebtedness 'Sec) 10-
Sec) 10 $ower to increase or decrease capital stoc8# inc.r, create or increase bonded
indebtedness > (o corporation shall increase or decrease its capital stoc8 or inc.r, create or
increase any bonded indebtedness .nless approved by a ma:ority vote of the board of
directors and, at a stoc8holderNs meeting d.ly called for the p.rpose, 2J1 of the o.tstanding
capital stoc8 shall favor the increase or dimin.tion of the capital stoc8, or the inc.rring,
creating, or increasing ant bonded indebtedness) <ritten notice of the proposed increase or
dimin.tion of the capital stoc8 or of the inc.rring, creating, or increasing of any bonded
indebtedness and of the time and place of the stoc8holders meeting at which the proposed
increase or dimin.tion of the capital stoc8 or the inc.rring or increasing of any bonded
indebtedness is to be considered, m.st be addressed to each stoc8holder at his place of
residence as shown on the boo8s of the corporation and deposited to the addressee in the
post office with postage prepaid, or served personally)
A certificate in d.plicate m.st be signed by a ma:ority of directors of the corporation and
co.ntersigned by the chairman and the secretary of the stoc8holdersN meeting, setting forth;
1) /hat the re7.irements of this section have been complied with#
2) /he amo.nt of the increase or dimin.tion of the capital stoc8#
1) 4f an increase of the capital stoc8, the amo.nt of capital stoc8 or n.mber of shares of
no5par stoc8 thereof act.ally s.bscribed the names, nationalities, residences of the
persons s.bscribing, the amo.nt of capital stoc8 or n.mber of no5par stoc8 s.bscribed
by each), and the amo.nt paid by each on his s.bscription in cash or property, or the
amo.nt of capital stoc8 or n.mber of shares of no5par stoc8 allotted to each
stoc8holder if s.ch increase is for the p.rpose of ma8ing effective stoc8 dividend
thereof a.thori?ed#
*) Any bonded indebtedness to be inc.rred, created or increased#
+) /he act.al indebtedness of the corporation on the day of meeting#
3) /he amo.nt of stoc8 represented at the meeting# and
Revised Bagtas Reviewer by Ve and Ocfe 2A
6) /he vote a.thori?ing the increase or dimin.tion of the capital stoc8, or the
inc.rring, creating, or increasing of any bonded indebtedness)
Any increase or decrease in the capital stoc8 or the inc.rring, creating or increasing any
bonded indebtedness shall re7.ire prior approval of the Sec.rities and "change %ommission)
One of the d.plicate certificates shall be 8ept on file in the office of the corporation and the
other shall be filed with the Sec.rities and "change %ommission and attached to the original
articles of incorporation) From and after approval by the Sec.rities and "change %ommission
and the iss.ance by the %ommission of its certificate of filing, the capital stoc8 shall stand
increased or decreased and the inc.rring, creating or increasing any bonded indebtedness
a.thori?ed, as the certificate of filing may declare $rovided, /hat the Sec.rities and "change
%ommission shall not accept for filing any certificate of increase of capital stoc8 .nless
accompanied by the sworn statement of the treas.rer of the corporation lawf.lly holding
office at the time of the filing of the certificate, showing that at least 2+R of s.ch increased
capital stoc8 has been s.bscribed and that at least 2+R of the amo.nt s.bscribed has been
paid either in act.al cash to the corporation or that there has been transferred to the
corporation property the val.ation of which is e7.al to 2+R of the s.bscription; $rovided
f.rther, that no decrease of the capital stoc8 shall be approved by the %ommission if its effect
shall pre:.dice the rights of corporate creditors)
(on5stoc8 corporations may inc.r or create bonded indebtedness or increase the same with
the approval by a ma:ority vote of the board of tr.stees and of at least 2J1 of the members in
a meeting d.ly called for that p.rpose)
Bonds iss.ed by a corporation shall be registered with the Sec.rities and "change
%ommission, which shall have the a.thority to determine the s.fficiency of the terms thereof)
Bond > sec.rity representing denominated .nits of indebtedness iss.ed by a corporation to
raise money or capital obliging the iss.er to pay the mat.rity val.e at the end of a specified
period which sho.ld be not less than 132 days) /hat is why not all indebtedness of the
corporation re7.ire the ratification of the stoc8holders, only bonded indebtedness re7.ire the
ratification of the stoc8holders)
A bond in contrast to a promissory note represents a .nit of a large indebtedness, whereas a
promissory note represents a single indebtedness and may stand on its own) 9ostly all
properties of the corporation i)e) the b.siness enterprise comprise of the sec.rity of s.ch
bonded indebtedness)
/he S"% also re7.ire that a company has a minim.m net worth of $2+ 9 at the time of the
filing of the application and m.st have been in operation for three years)
4&5 Sell or Dispose of Assets 'Sec) *2-
Sale by Board of /r.stees of the only corporate property witho.t compliance with Sec)
*2 of %orporation %ode re7.iring ratification of members representing at least two5thirds
of the membership, wo.ld ma8e the sale n.ll and void) 'slamic /irectorate v. Court of
!ppeals, 262 S%RA *+* '1,,6-# PeCa v. C!, 1,1 S%RA 616 '1,,1-)
Sec) *2 Sale or other disposition of assets > S.b:ect to the provisions of eisting law on illegal
combination and monopolies, a corporation may by a ma:ority vote of its board of directors or
tr.stees, sell, lease, echange, mortgage, pledge or otherwise dispose of all or s.bstantially
all of its property and assets incl.ding its goodwill, .pon s.ch terms and conditions and for
s.ch consideration, which may be money, stoc8s, bonds or other instr.ments for the payment
of money or other property or consideration as its board of directors or tr.stees deem
epedient, when a.thori?ed by the vote of stoc8holders representing at least 2J1 of the
o.tstanding capital stoc8, or in the case of non5stoc8 corporation, by the vote of at least 2J1
of the members, in a stoc8holdersN or membersN meeting d.ly called for that p.rpose) <ritten
notice of the proposed action and of the time and place of the meeting shall be addressed to
each stoc8holder or members at his place of residence as shown on the boo8s of the
corporation and deposited to the addressee in the post office with postage prepaid paid, or
served personally; $rovided, that any dissenting stoc8holder may eercise his appraisal right
.nder the conditions provided for in the %ode)
12
+
A sale or other disposition shall be deemed to cover s.bstantially all the corporate property
and assets if thereby the corporation wo.ld be rendered incapable of contin.ing the b.siness
or accomplishing the p.rpose for which it was organi?ed)
After s.ch a.thori?ation or approval by the stoc8holders or members, the board of directors
or tr.stees, may nevertheless, in its discretion, abandon s.ch sale, lease, echange,
mortgage, pledge or other disposition of property and assets s.b:ect to the rights of third
parties .nder any contracting relating thereto witho.t f.rther action or approval by the
stoc8holders or members)
(othing in this section is intended to restrict the power of any corporation, witho.t the
a.thori?ation by the stoc8holders or members, to sell, lease, echange, mortgage, pledge or
otherwise dispose of any of its property and assets if the same is necessary in the .s.al and
reg.lar co.rse of b.siness of said corporation or if the proceeds of the sale or other
disposition of s.ch property and assets be appropriated for the cond.ct of its remaining
b.siness)
4n non5stoc8 corporations where there are no members with voting rights, the vote of at least
a ma:ority of the tr.stees in office will be s.fficient a.thori?ation for the corporation to enter
into any transaction a.thori?ed by this section)
(O/"; <hen the transaction is in the normal co.rse of b.siness, it only needs the ma:ority of
the 7.or.m of the Board of Girector to approve s.ch transaction) Mowever, when s.ch is in
the etraordinary co.rse of the b.siness as in the disposition of all or s.bstantially all of the
assets of the corporation, s.ch needs the vote of the absol.te ma:ority of the Board of
Girectors pl.s the ratification of 2J1 vote of stoc8holders representing at least 2J1 of the
o.tstanding capital stoc8 of the corporation in case it is a stoc8 corporation, or in the case of
a non5stoc8 corporation, 2J1 of the members)
/his case is one of the eceptions to the r.le where the stoc8holders have proprietary
interests in the b.siness enterprise) /his is also an eception to the r.le that generally the
Board of Girectors have the power to bind the, and transact for the corporation)
4f transactions are entered into relating to this section witho.t the ratification of the
stoc8holders, s.ch transaction is void for it is illegal per se as it r.ns contrary to Sec) *2 of the
%orporation %ode)
"ample; San 9ig.el decides to sell its $ale $ilsen form.la, b.t retains all of its $ *B worth of
investment, will s.ch transaction need the ratification of the stoc8holders and the absol.te
ma:ority vote of the BoardD Hes, since it concerns s.bstantially all of the assets of the
corporation as s.ch form.la pertains to the capacity of the corporation to earn) /he absence
of s.ch ratification violates the social compact as between the stoc8holders and the
corporation) S.ch sale violates the contract.al epectation of these stoc8holders, and as
s.ch, their ratification m.st be availed of before it may be entered into) /he same is also the
case, if San 9ig.el decides to share the $ *B and retain the $ale $ilsen form.la)
4,5 "n*est Corporate $unds for Non5Primar' Purpose Endea*or 'Sec) *2# a/e la *ama
v. Ma<ao Sugar Central Co), 26 S%RA 2*6 K1,3,L-
Sec) *2 $ower to invest corporate f.nds in another corporation or b.siness or for any other
b.siness p.rpose > S.b:ect to the provisions of this %ode, a private corporation may invest its
f.nds in any other corporation or b.siness or for any p.rpose other than the primary p.rpose
for which it was organi?ed when approved by a ma:ority of the board of directors or tr.stees
and ratified by the stoc8holders representing at least 2J1 of the o.tstanding capital stoc8, or
at least by 2J1 of the members in the case of non5stoc8 corporations, at a stoc8holdersN or
membersN meeting d.ly called for that p.rpose) <ritten notice of the proposed investment
and the time and place of the meeting shall be addressed to each stoc8holder or member at
his place of residence as shown on the boo8s of the corporation and deposited to the
addressee in the post office with postage prepaid or served personally; $rovided, /hat any
dissenting stoc8holder shall have appraisal right as provided in this %ode; $rovided however,
/hat where the investment by the corporation is reasonably necessary to accomplish its
primary p.rpose as stated in the articles of incorporation, the approval of the stoc8holders or
members shall not be necessary)
Revised Bagtas Reviewer by Ve and Ocfe 2A
G" &A RA9A v) 9A5AO SUEAR %"(/RA& %O)
Facts;
Ge la Rama et)al) contend that 9a5ao S.gar %entral thro.gh its $resident, s.bscribed $122,222 worth
of capital stoc8 of the $hilippine Fiber $rocessing %o) 4nc) /hey allege that the time of the first two
payments were made there was no board resol.tion a.thori?ing the investment and that it was only
before the third payment that the $resident was so a.thori?ed by the Board of Girectors) Ge la Rama
also contends that even ass.ming, arg.endo, that the said Board Resol.tions are valid, the
transaction is still wanting in legality, no resol.tion having been approved by the affirmative vote of
the stoc8holders holding shares in the corporation, entitling them to at least 2J1 of the voting power)
4ss.e; <O( the investment of corporate f.nds of 9a5ao were in violation of corporation law)
Meld;
4nvestment of corporate f.nds in another corporation if done in p.rs.ance of the corporate p.rpose,
does not need the approval of the stoc8holders, b.t where the p.rchase of the shares of another
corporation is done solely for investment and not to accomplish the p.rpose of its incorporation, the
vote of approval of the stoc8holders is necessary) /he investment made in $hilippine Fiber was
.pheld by the S%) $hilippine Fiber was engaged in the man.fact.re of bags or investments in another
corporation engaged in the man.fact.re of bags) Since the s.gar central is engaged in the
man.fact.re of s.gars, s.gar bags necessarily wo.ld come .nder the p.rview of its needs .nder the
reg.lar co.rse of b.siness
Any corporation whatever its primary p.rpose has a choice of placing s.ch f.nd either in a
savings or time deposit acco.nt or in money mar8et placements, or treas.ry bills, or even in
shares of stoc8s of other corporations which are traded in the stoc8 echange) /he eercise of
s.ch b.siness :.dgment on the part of the board in consistency with the primary p.rpose,
since it is epected even from the stoc8holders to believe, that it is within the ordinary
b.siness discretion of the Board to place the corporationNs investible f.nd in the form of
investment that wo.ld yield the best possible ret.rn to the corporation and wo.ld not re7.ire
the ratification of the stoc8holders or members each time)
Motel %orporation invest 29 in 129 Bagoong %ompany in this case while it contemplates a
sit.ation where the Board eercises ordinary b.siness discretion, s.ch investment wo.ld r.n
contrary to the relationship of the Board to the stoc8holders whereby they engaged to
manage the hotel corporation alone, and whereby they vowed to devote all their time and all
their effort in s.ch corporation) By investing in 22R of another corporation, said Board
obtained a very big role in the management of s.ch corporation, hence s.ch wo.ld r.n
contrary to its obligation to the stoc8holders to ta8e care of the b.siness enterprise of the
hotel corporation and not any other corporationNs b.siness enterprise) As s.ch, it wo.ld need
a ratificatory vote of 2J1 of the stoc8holders)
Motel %ompany invest 29 in 122B San 9ig.el %orporation in this case, the ratificatory vote
is not needed since s.ch is really within the ordinary b.siness discretion of the Board) And by
investing only in a relatively minimal share in the assets of another company, it does not
really engage in the b.siness enterprise of another corporation, hence, they still afford priority
to the b.siness enterprise of the hotel corporation)
495 Declare Di*idends 'Sec) *1# aielson # Co. v. Lepanto Consolidated Mining Co., 23
S%RA +*2 K1,30L-
Sec) *1 $ower to declare dividends > /he board of directors of a stoc8 corporation, may
declare dividends o.t of the .nrestricted retained earnings which shall be payable in cash, in
property or in stoc8 to all stoc8holders on the basis of o.tstanding stoc8 held by them;
$rovided, /hat any cash dividend d.e on delin7.ent stoc8 shall first be applied to the .npaid
balance on the s.bscription pl.s costs and epenses, while stoc8 dividends shall be withheld
from the delin7.ent stoc8holder .ntil his paid s.bscription is f.lly paid; $rovided f.rther, that
no stoc8 dividend shall be iss.ed witho.t the approval of stoc8holders representing not less
than 2J1 of the o.tstanding capital stoc8 at a reg.lar or special meeting d.ly called for that
p.rpose)
12
6
Stoc8 corporations are prohibited from retaining s.rpl.s profits in ecess of 122R of their
paid5in capital stoc8, ecept; '1- when :.stified by definite corporate epansion pro:ects or
programs approved by the board of directors# or '2- when the corporation is prohibited .nder
any loan agreement with any financial instit.tion or creditor whether local or foreign, from
declaring dividends witho.t itsJhis consent, and s.ch consent has not yet been sec.red# or '1-
when it can be clearly shown that s.ch retention is necessary .nder special circ.mstances
obtaining in the corporation, s.ch when there is need for special reserve for probable
contingencies)
(4"&SO( I %O) v) &"$A(/O %O(SO&4GA/"G 94(4(E %O)
Facts;
4n 1,16, &epanto entered into a management contract with (ielson) 4n this agreement, (ielson was
to manage and operate the 9an8ayan mining claim of &epanto in consideration for 'a- $2,+22 a
month and 'b- 12R of dividends declared and paid) 4n 1,*1, &epanto declared dividends amo.nting
to $16+,222 12Rof which (ielson was entitled to $16,+22) &epanto however never paid (ielson a
cent) G.ring the liberation in 1,*+, &epanto .nilaterally terminated the management contract with
(ielson) 4n 1,+0, (ielson instit.ted an action for its 12R share in the dividends declared by &epanto
in 1,*1) /he s.it reached the S% and it decided against &epanto in 1,*1) /he s.it between (ielson
and &epanto was s.spended in 1,*2 when the US Army bombarded the 9an8ayan mining claims,
th.s preventing (ielson from complying with its obligation 'i)e) operating and managing the claim-)
/he trib.nal f.rther said that the contract remained s.spended even after the war was over in 1,*+
.ntil 1,*0 when the mines were f.lly operational# and that the management contract still had five
years to go from 1,*0) /h.s, the S% stated that (ielson was entitled to 12R of the dividend
declarations in 1,*, and 1,+2 worth $19) &epanto so.ght reconsideration of S%Ns decision in 1,33) 4t
raised two main points at iss.e namely; '1- <hat is the nat.re of the management contractD 4s it one
of agency and hence terminable at the principalNs will or is it a contract of lease of services which
may be terminated only .pon agreed ca.sesD '2- 4s (ielson entitled to 12R of the stoc8 dividend
even tho.gh &epanto is not a stoc8holderD
Meld;
/he management contract is a contract for lease of service) '1- /he theory of agency was raised only
on reconsideration which is a belated move by &epanto '2- Agency is premised on representation
while lease of service is based on employment) <hile an agent can eec.te :.ridical acts in behalf of
his principal # an employee .nder a lease of service can only perform non5:.ridical acts or only
material acts) '1- Since the acts of (ielson 'eploration, p.rchase, etc)- are s.b:ect to general control
and approval of the Board of Girectors of &epanto and cannot create, modify, eting.ish b.siness
relations between &epanto and (ielson, these acts can only be considered as material acts done for
an employer for compensation) /he contract, is therefore, a contract of lease of services) Being s.ch
a contract, it cannot be revocable at the will of the employer) /he contract specifically provided that
&epanto can cancel the contract only; a)- .pon the ,25day written notice and b)- for (ielsonNs fail.re
to operate and develop the mining claims for any ca.se ecept those ca.ses d.e to the acts of Eod)
'*- Since the war and the bombardment constit.te acts of Eod, they cannot be considered as
gro.nds to terminate the contract) 4n fact, the contract is deemed s.spended from 1,*2 to 1,*0
when neither of the parties co.ld comply with their obligations .nder it) Under its terms, the contract
is s.spended in cases of fort.ito.s events) And s.ch terms m.st be interpreted to mean that a
period e7.al to the period of s.spension m.st be added to the original term of the contract by way of
etension) /h.s, from 1,*0 the contract still had five more years) And by virt.e of this etension,
(ielson is entitled to 12R of the dividends declared in 1,*, and 1,+2)
Stoc8 dividend is the amo.nt that the corporation transfers from its s.rpl.s profit
acco.nt to its capital acco.nt) 4t is the same amo.nt that can loosely be termed as the
@tr.st f.ndA of the corporation) %C v. C!, 111 S%RA +20 '1,,,-)
h- Enter into -ana+ement Contracts 'Sec) **# aielson # Co., 'nc. v. Lepanto
Consolidated Mining, 23 S%RA +*2 K1,30L# *icafort v. Mo&a, 1,+ S%RA 2*6 K1,,1L-) W)'
t)e difference in rule bet(een entit' and indi*idual,
Sec) ** $ower to enter into management contracts > (o corporation shall concl.de a
management contract with another corporation .nless s.ch contract shall have been
approved by the board of directors and by stoc8holders owning at least the ma:ority of the
Revised Bagtas Reviewer by Ve and Ocfe 2A
o.tstanding capital stoc8, or by at least a ma:ority of the members in the case of a non5
stoc8 corporation of both managing and the managed corporation at a meeting d.ly called for
that p.rpose; $rovided, /hat '1- where a stoc8holder or stoc8holders representing the same
interest of both the managing and managed corporations own or control more than 1J1 of the
total o.tstanding capital stoc8 entitled to vote of the managing corporation# or '2- where a
ma:ority of the members of the board of directors of the managing corporation also constit.te
a ma:ority of the members of the board of directors of the managed corporation, then the
management contract m.st be approved by the stoc8holders of the managed corporation
owning at least 2J1 of the total o.tstanding capital stoc8 entitled to vote, or by at least 2J1 of
the members in the case of a non5stoc8 corporation) (o management contract shall be
entered into for a longer period than five years for any one term)
/he provisions of the net preceding paragraph shall apply to any contract whereby a
corporation .nderta8es to mange or operate all or s.bstantially all of the b.siness of another
corporation, whether s.ch contracts are called service contracts, operating agreements or
otherwise; $rovided however, /hat s.ch service contracts or operating agreements which
relate to eploration, development, eploitation or .tili?ation of nat.ral reso.rces may be
entered into for s.ch periods as may be provided by the pertinent laws or reg.lations)
4. I/$#"&- P'*&(3
<hen the articles epressly provide that the p.rpose of the corporation was to @engage in
the transportation of person b& water,A s.ch corporation cannot engage in the b.siness of
land transportation, which is an entirely different line of b.siness, and, for which reason, may
not ac7.ire any certificate of p.blic convenience to operate a taicab service) Luneta Motor
Co. v. !./. Santos, 'nc), + S%RA 02, '1,32-)
A corporation whose primary p.rpose is to generate electric power has no a.thority to
.nderta8e stevedoring services to .nload coal into its pier since it is not reasonably necessary
for the operation of its power plant) PC v. 1era, 162 S%RA 621 '1,0,-)
A corporation organi?ed to engage as a lending investor cannot engage in pawbro8er)
Philipinas Loan Co. v. S"C, 1+3 S%RA 1,1 '2221-)
A mining company has not power to engage in real estate development) Heirs of !ntonio
Pael v. Court of !ppeals, 162 S%RA +06 '2221-)
An officer who is a.thori?ed to p.rchase the stoc8 of another corporation has implied
power to perform all other obligations arising therefrom s.ch as payment of the shares of
stoc8) 'nter<!sia 'nvestments 'ndustries v. Court of !ppeals, *21 S%RA *+2 '2221-)
5. I%."-&%t)# P'*&(3
/he act of iss.ing chec8s is within the ambit of a valid corporate act, for it as for sec.ring
a loan to finance the activities of the corporation, hence, not an ultra vires act) !trium
Management Corp. v. C!, 1+1 S%RA 21 '2221-)
<. Ot!&( P'*&(3
a= Sell !and and t)er Properties
<hen the corporationNs primary p.rpose is to mar8et, distrib.te, eport and import
merchandise, the sale of land is not within the act.al or apparent a.thority of the
corporation acting thro.gh its officers, m.ch less when acting thro.gh the treas.rer)
&i8ewise Articles 106* and 1060 of %ivil %ode re7.ires that when land is sold thro.gh an
agent, the agentNs a.thority m.st be in writing, otherwise the sale is void) San )uan
Structural v. C!, 2,3 S%RA 311 '1,,0-# !, *ealt& # /ev., 'nc. v. /ieselman ,reight
Services Co., 161 S%RA 10+ '2222-# ,irme v. Bu+al "nterprises and /ev. Corp., *1* S%RA
1,2 '2221-)
b= 0orro( $unds
12
,
/he power to borrow money is one of those cases where even a special power of
attorney is re7.ired .nder Art) 1060 of %ivil %ode) /here is invariably a need of an
enabling act of the corporation to be approved by its Board of Girectors) /he arg.ment
that the obtaining of loan was in accordance with the ordinary co.rse of b.siness
.sages and practices of the corporation is devoid of merit beca.se the prevailing
practice in the corporation was to eplicitly a.thori?e an officer to contract loans in
behalf of the corporation) China Ban+ing Corp. v. Court of !ppeals, 262 S%RA +21
'1,,6-)
a2 Po(er to Sue
Under Sec) 13 of %orporation %ode, in relation to Sec) 21, where a corporation is an
in:.red party, its power to s.e is lodged with its Board of Girectors) A minority stoc8holder
who is a member of the Board has no s.ch power or a.thority to s.e on the corporationNs
behalf) %am 5ing %a+ v. Ma+asiar, 1+2 S%RA *6+ '2221-# Shipside 'nc. v. Court of !ppeals,
1+2 S%RA 11* '2221-# SSS v. C7!, 10* S%RA +*0 '2222-)
<here the corporation is real party5in5interest, neither administrator or a pro:ect
manager co.ld sign the certificate against for.m5shopping witho.t being d.ly a.thori?ed
by resol.tion of the Board of Girectors '"steban, )r. v. 1da. /e 7norio, 132 S%RA 212
K2221L-, nor the Eeneral 9anager who has no a.thority to instit.te a s.it on behalf of the
corporation even when the p.rpose is to protect corporate assets) 'Central Cooperative
"(change 'nc. v. "nciso, 132 S%RA 623 K1,00L-)
<hen the power to s.e is delegated by the by5laws to a partic.lar officer, s.ch officer
may appoint co.nsel to represent the corporation in a pre5trial hearing witho.t need of a
formal board resol.tion) Citiban+, .!. v. Chua, 222 S%RA 6+ '1,,1-)
For co.nsel to sign the certification for the corporation, he m.st specifically be
a.thori?ed by the Board of Girectors) BP' Leasing Corp. v. C!, *13 S%RA * '2221-#
Mariveles Ship&ard Corp. v. C!, *1+ S%RA +61 '2221-)
2d3 Pro*ide %ratuit' Pa' for Emplo'ees
$roviding grat.ity pay for employees is an epress power of a corporation .nder the
%orporation %ode, and cannot be considered to be ultra vires to avoid any liability arising
from the iss.ance of resol.tion granting s.ch grat.ity pay) Lope. *ealt& v. ,ontecha, 2*6
S%RA 101, 1,2 '1,,+-)
>e= Donate
2f3 "nter Partners)ip or :oint 9enture) a%uason # Co. v. Bolanos, ,+ $hil) 123 '1,+*-# S"%
Opinion, dated 2, Febr.ary 1,02)
/UASO( I %O) v) BO&A(OS
Facts;
=9 /.ason I %o) 4nc) represented by its managing partner Eregorio Araneta 4nc) filed a complaint in
the %F4 for recovery of possession of registered land sit.ated in /atalon, C% against C.irino Bolanos)
Gefendant in his answer claims thro.gh prescription and that the registration of said land was
obtained thro.gh fra.d) /he %F4 r.led in favor of the plaintiff and declared that defendant had no
right to the land) Mence, this appeal)
4ss.e; <O( the case sho.ld have been dismissed on the gro.nd that it was not bro.ght by the real
party in interestD
Meld;
(o, the r.les of co.rt re7.ire that an action be bro.ght in the name of b.t not necessarily by the real
party in interest) 4n fact,the practice really is for the attorney5at5law to bring the action and file the
complaint in plaintiffNs name which was done her) And while it is tr.e that the complaint also states
that the plaintiff is represented herein by its managing partner E) Araneta 4nc) another corporation,
there is nothing against one corporation being represented by another person, nat.ral or :.ridical in
a s.it in co.rt)
Revised Bagtas Reviewer by Ve and Ocfe 2A
/he contention that E) Araneta 4nc) cannot act as managing partner on the theory that it is illegal for
two corporations to enetr into a partnership is witho.t merit for the tr.e r.le is that tho.gh a
corporation has no power to enter into a partnership, it may nevertheless enter into a :oint vent.re
with another where the nat.re of the vent.re is inline with the b.siness a.thori?ed by is charter)
/here is nothing in the record to show that the vent.re which plaintiff is represented by E) Araneta is
not inline with the corporate b.siness of either corporation)
/he S"% r.le provides in an Opinion, that the right of the corporation to engage as a limited
partner 'not a general partner, meaning that its liability is limited to the amo.nt of investment it
po.rs into the partnership-) B.t s.ch a power to engage in a partnership m.st be specifically
provided for in the corporationNs charter)
GUICK RE6ERENCE ON THE POWERS O6 THE CORPORATION
$O<"R S/A/U/ORH
R"CU4R"9"(/
$RO%"GUR" <4/M OR <4/MOU/
A$$RA4SA& R4EM/
$ower to shorten or
etend corporate term
'Sec) 16-
Approved by a
ma:ority vote of the
Board of Girectors
'ma:ority of the
7.or.m-
Ratified by at least
2J1 of the O%S or
2J1 of members in a
non5stoc8
corporation)
<ritten notice to
each stoc8holder
"tension Hes,
s.ch constit.tes a
novation of the
contract)
Shortening (o, b.t
not beca.se s.ch is
inherent, beca.se s.ch
is not inherent as it
constit.tes an
alteration of the
powers granted it by
the State)
$ower to increase
capital stoc8 and also
the power to decrease
capital stoc8 'Sec) 10-
Approved by a
ma:ority vote of the
Board of Girectors
'ma:ority of
7.or.m-
Ratified by at least
2J1 of the O%S
<ritten notice to
each stoc8holders
Special
doc.mentary
re7.irements
$rior approval of
the S"%# S"% shall
not accept for filing
.nless with a sworn
statement by
treas.rer that 2+5
2+ r.le complied
with
S"% approval
triggers effectivity
4ncrease (one,
dil.tes the worth of
the stoc8, defeats
the p.rpose of the
increase)
Gecrease (one,
beca.se in effect there
is a ret.rn of part of
investments of the
stoc8holders
$ower to inc.r, create
or increase
indebtedness 'Sec) 10-
Approved by a
ma:ority vote of the
Board of Girectors
'ma:ority of
7.or.m-
<ritten notice
$rior approval of
the S"%
S.pporting
doc.ments
(one > drains the
corporation of financial
reso.rces contrary to
the p.rpose for which
the power is eercised)
11
1
Ratified by at least
2J1 of the O%S
S"% 4(/"R49
EU4G"&4("S
%orporation m.st have;
9inim.m net worth
of $2+ 9 at the
time of the filing of
the application
Mave been in
operation for at
least 1 years
9.st f.lfill financial
ratio mandated by
S"% in interim
g.idelines
re7.ired;
1- tr.st indent.re
with a tr.stee
ban8
2- .nderwriting
agreement
Bonds registered
with the S"%
$ower to sell, dispose,
lease, enc.mber 'Sec)
*2-
A&& C.antitative
/est
SUBS/A(/4A&&H A&&
C.alitative /est
'p.rpose for which it
was incorporated-
1- Of all or
s.bstantially all of
its property
9a:ority vote of
Board of Girectors
'ma:ority of
7.or.m-
Ratified or
approved by 2J1 of
the O%S or 2J1 of
the members
Relates to the
primary p.rpose)
2- "ception to Sec)
*2 > if the sale is
necessary in the
.s.al and reg.lar
co.rse of b.siness
or if proceeds of
the sale or other
disposition of s.ch
property and assets
be appropriated for
the cond.ct of its
remaining
b.sinesses
9a:ority vote of
Board of Girectors
'b.siness :.dgment
r.le
Goes not relate to
primary or
secondary p.rpose
'1- 9.st
comply with the
B.l8 Sales &aw
&isting the
corporate creditors
and the amo.nt
and nat.re of their
claims
Fail.re renders
transaction void
'2- 4f no ratificatory
vote of stoc8holders, it
is an .tra vires act of
the third 8ind
Hes, s.ch a sale does
not necessarily leas to
a dissol.tion of the
corporation and ret.rn
of the resid.al val.e of
the corporation) S.ch is
afforded as a matter of
e7.ity and fairness)
$ower to p.rchase own
shares 'Sec) *1-
B.y bac8 of shares 'i-
decrease the cost of
doing b.siness 'ii-
perpet.ate control of
the enterprise)
9.st be for a legitimate p.rpose > eample;
'1- eliminate fractional shares arising o.t
of stoc8 dividends
'2- collect or compromise an
indebtedness to the corporation
arising o.t of .npaid s.bscription in a
delin7.ency sale, and to p.rchase
delin7.ent shares d.ring said sale and
'1- to pay dissenting or withdrawing
(one
Revised Bagtas Reviewer by Ve and Ocfe 2A
stoc8holders eercising their
appraisal right
/a8en from UR" only ecept redeemable
shares
$ower to invest
corporate f.nds in
another corporation or
b.siness or for any
other p.rpose 'Sec)
*2-
Approved by a
ma:ority vote of
the Board of
Girectors 'ma:ority
of 7.or.m-
Ratified by at least
2J1 of the O%S
As a general r.le,
section *2 applies
if the investment
is for secondary or
other than the
primary p.rpose)
"cept if the
investment is
reasonably
necessary to
accomplish its
primary p.rpose
as stated in the
Articles of
4ncorporation,
approval of the
stoc8holders is not
necessary as it is
incl.ded in the
B.siness =.dgment
of Board of
Girectors
<ritten notice of
the proposed
investment and
the time and place
of meeting shall
be addressed to
each stoc8holder
or member at his
place of residence
as shown in the
boo8s of the
corporation and
deposited to the
addressee in the
$ost Office with
postage prepaid or
served personally)
Hes, beca.se min.s
the ratificatory vote
the contract or
transaction falls .nder
the realm of .ltra
vires transactions of
the third type)
$ower to declare
dividends 'Sec) *1-
%ash dividends
'1-
Absol.te
ma:ority of
Board of
Girectors in
accordance
with the
B.siness
=.dgment R.le
'2- Only declared o.t
of the UR" which shall
be payable in cash, in
property or in stoc8
'1- Mowever, cash
dividends d.e on
delin7.ent shares
shall be first applied
to the .npaid balance
while stoc8 dividends
shall be withheld .ntil
f.lly paid
Stoc8 dividends
approval of 2J1 of
Sec) *1 prohibits
stoc8 corporation
from retaining
s.rpl.s profits in
ecess of 122R of
their paid5.p
capital stoc8,
"B%"$/;
'1- <hen
:.stified by
definite
corporate
epansion
pro:ects or
programs as
approved by
the Board of
Girectors
'2- <hen corporation
is prohibited .nder
any loan agreement
from declaring
dividends witho.t its
consent and s.ch
Hes)
11
1
the O%S at a
reg.lar or special
meeting called for
that p.rpose)
consent has not yet
been sec.red or
'1- <hen it can be
clearly shown that s.ch
retention is necessary
.nder special
circ.mstances
obtaining in the
corporation s.ch as
when there is need for
special reserve for
profitable
contingencies)
$ower to enter into
management contracts
'Sec) **-
Approved by absol.te ma:ority of the Board
of Girectors
Approved by stoc8holders owning ma:ority of
the O%S
MO<"V"R where;
'1- Stoc8holders representing the same interest
of both managing and the managed corporation
own or control more than 1J1 of the total O%S
entitled to vote of the managing corporation OR
'2- <here a ma:ority of the members of the
Board of Girectors of the managing corporation
also constit.te a ma:ority of the members of the
Board of Girectors of the managed corporation)
/hen it m.st be approved by the stoc8holders of
the managed corporation owning at least 2J1 of
the O%S
"B%"$/ if the corporation is organi?ed primarily
as management company)
(ot for a period longer than five years for any
one term)

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